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| CDIC > SEC Filings for CDIC > Form 10-Q on 14-Apr-2009 | All Recent SEC Filings |
14-Apr-2009
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, 2008. 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, 2008 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, 2008, 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 February 28, 2009 and February 29, 2008)
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 market 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, the latest generation ICG monitor, with Philips. These strategic relationships further validate the importance of our technology to the clinical community and provide additional distribution channels for our systems. We continue to evaluate additional strategic partnerships to accelerate the validation, distribution, and adoption of our technology.
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 was 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, the results of our multi-center CONTROL study were published 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 strong 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 and are targeting inclusion of ICG in medical society treatment guidelines.
In June of 2004, we completed the acquisition of 80% of all outstanding shares of Medis Medizinische Messtechnik GmbH ("Medis") based in Ilmenau, Germany. Medis is a manufacturer of diagnostic and monitoring devices, which utilize ICG technology for its cardiovascular products sold outside of the United States.
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, 2008 for addition information regarding the risks we face.
Following is a summary of several key financial results in our first quarter of 2009 as compared with the first quarter of 2008, as well as some important metrics from the first quarter:
Net sales of $5.1 million, a 12% decrease from $5.8 million, but a 3% increase excluding large Eastern European hospital group sales in the first quarter of 2008 and 2009
ICG sensor revenue increased 12% to $1.7 million, representing 33% of net sales, up from $1.5 million, or 26% of sales
Gross profit margin as a percentage of sales improved to 73%, up from 69%
Operating expenses were reduced 2% to $4,764,000
Operating loss was $1.0 million, which included $200,000 of non-cash charges for depreciation, amortization and equity compensation
Net loss from continuing operations was $1.4 million, or $0.20 per diluted share, down 10% from $1.6 million, or $0.23 per diluted share
Cash, equivalents and short-term investments were $4.6 million, compared to $7.6 million
Additional key operating metrics for the first quarter of 2009:
ICG capital sales totaled 158 units bringing the cumulative total sold to over 8,900 ICG monitors and modules, up 11% from 8,000 one year ago
BioZ system sales grew 12% to 76 units, up from 68 units in the first quarter of 2008
Domestic direct sales increased by 19% to $3.9 million, up from $3.3 million during the first quarter of 2008
Field sales headcount totaled 72 associates, up from 70 one year ago
Investors retained $5.25 million investment in Company's 8% convertible notes
Operating Segment
The ICG business encompasses 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.
Net Sales - Net sales for the three months ended February 28, 2009 were $5,072,000, down 12% from $5,762,000 for the three months ended February 29, 2008. The comparative sales decrease is principally due to large $1.3 million and $500,000 sales to an Eastern European hospital distributor in the first quarter of 2008 and the first quarter of 2009, respectively. Excluding these Eastern European hospital sales, we experienced growth of 3%, or $107,000. We sold 158 ICG units in the first quarter which included 25 ICG Modules and 133 stand-alone ICG Monitors, comprised of 68 BioZ Dx Systems, 8 BioZ Monitors, and 57 Medis ICG Monitors. Partially offsetting the decline in unit sales was a 23% increase in the average unit sales price of our ICG stand-alone Monitors, as compared with the first quarter of 2008. This increase in average unit selling price is principally due to a proportionately greater mix of our higher priced BioZ and BioZ Dx systems sold in the first quarter of 2009, as compared to the first quarter of 2008 that included 117 Niccomo units sold to an Eastern European hospital purchaser.
Net sales for the three months ended February 28, 2009 by our domestic direct sales force, which targets physician offices and hospitals, increased 19% to $3,927,000, from $3,293,000 in the same quarter last year. Sales headcount averaged 72 associates during the quarter, including 32 U.S. territory managers and 25 clinical application specialists, up from 70 sales associates in the same quarter one year ago.
For the three months ended February 28, 2009, international and new market sales decreased to $973,000, from $2,345,000 in the same period last year. The decrease is attributable to a decline in sales at our Medis unit, which benefited from a large sale to an Eastern European hospital group, which occurred 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 up 12% in the three months ended February 28, 2009 to $1,677,000, representing 33% of consolidated net sales, compared with $1,501,000 or 26% of consolidated net sales in the same quarter last year. We have now shipped over 7.4 million ICG sensor sets to customers since introducing the BioZ ICG Monitor in 1998.
We believe that sensor revenue growth, to some degree, will be based upon an increasing mix of BioZ Dx Systems in our installed base, the success of our CAS team's focused customer service efforts including the expansion of two recent strategic marketing programs, the Comprehensive Customer Care (C3) program designed to improve our customer care, ICG satisfaction and proper utilization; and the 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. 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 $142,000 and $105,000 for the three months ended February 28, 2009 and February 29, 2008, respectively.
Stock-Based Compensation Expense - Stock-based compensation expense for the three months ended February 28, 2009 was $107,000, compared with $84,000 for the three months ended February 29, 2008. Note 1 to the Consolidated Financial Statements segregates the individual operating expense line item amounts of stock-based compensation.
Gross Margin - Gross margin for the three months ended February 28, 2009 and February 29, 2008 was $3,717,000 and $3,987,000, respectively, a decrease of $270,000 or 7%. The current quarter decrease was largely the result of 12% lower sales volume, partially offset by lower expenses related to our provision for excess, slow moving or obsolete inventory and higher average selling prices of our ICG monitors. As a percentage of net sales, gross margin in the first quarter of 2009 was 73%, up from 69% from the same quarter last year. The increased percentage during the first quarter of 2009 was primarily the result of 23% 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. We recorded $313,000 of obsolescence expense related to our previous generation BioZ Systems in the three months ended February 29, 2008, but did not incur any obsolescence expense during our first quarter of 2009.
Research and Development Expenses - We invested $395,000 and $314,000 in research and development for the three months ended February 28, 2009 and February 29, 2008, respectively. The increased investment in 2009 is primarily due to product development initiatives, which began during Fiscal 2008. We anticipate completing these initiatives by the end of Fiscal 2009.
Selling and Marketing Expenses - Selling and marketing expenses decreased by $152,000 or 4% to $3,570,000 during the three months ended February 28, 2009, as compared with $3,722,000 in the comparable quarter last year. The decrease is primarily due to a $241,000 reduction in compensation expenses and $149,000 of lower travel expenses. This was partially offset by $174,000 provision for bad debt expenses and $73,000 of incrementally higher spending on ongoing clinical trials.
As a percentage of net sales, selling and marketing expenses were 70% of net sales for the three months ended February 28, 2009, up from 65% for the same quarter last year. The increased percentage of selling and marketing expenses to net sales in the current three month period is due primarily to lower net sales in the current period.
General and Administrative Expenses - General and administrative expenses for the first quarter of 2009 were $773,000, essentially unchanged from $771,000 for the same quarter last year. As a percentage of net sales, general and administrative expenses for the quarter ended February 28, 2009 were 15%, up from 13% for the quarter ended February 29, 2008.
Amortization of Intangible Assets - For the three months ended February 28, 2009, amortization expense was $26,000, compared with $32,000 for the same period in fiscal 2008. The decrease in the first quarter of 2009 was principally due fully amortizing some of our older patent costs, while at the same time not adding many new capitalized expenses. We expect this amount to drop significantly next quarter and into the future as the Medis intangible assets reach their 5 year fully amortized life.
Other Income (Expense) - Interest income during the three months ended February 28, 2009 and February 29, 2008 was $22,000 and $78,000, respectively. The decrease in interest income was due to significantly lower treasury rates, lower overall average cash balances and fewer internally financed receivables in 2009.
Interest expense was $247,000 and $234,000 in the quarters ended February 28, 2009 and February 29, 2008, respectively. The increase in interest expense is largely due to non-cash charges related to the accretion of the discount recorded on our convertible debt, which is amortized under the effective interest method.
We did not have any translation gains or losses during the first quarter of 2009, compared with $11,000 of foreign currency translation loss in the first quarter of 2008. Foreign currency translation charges 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 February 29, 2008 was $1,000. We did not have any other, net income during the three months ended February 28, 2009.
Minority Interest in Income of Subsidiary - For the three months ended February 28, 2009, we recorded $49,000 of minority interest in the income of our Medis subsidiary, which represents the 20% minority share retained by the sellers. This compares to $134,000 recorded for the three month period ended February 29, 2008. The decrease during the first three months of 2009 is the result of lower income earned during the period by our Medis subsidiary, largely related to the large Eastern European hospital group shipments in the first quarter of 2008.
Income Tax Provision - For the quarter ended February 28, 2009, we recorded a tax provision of $139,000, as compared to $134,000 in the first quarter of 2008. In each of the reported periods, the tax provisions are based on estimated foreign taxes and estimated minimum U.S. income and franchise taxes.
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 US 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 from Discontinued Operations - In last year's first quarter, we recorded a gain from discontinued operations of $127,000 related to the release of estimated accrued expenses associated with the sale of our former Vermed subsidiary. There was no discontinued operations activity during the quarter ended February 28, 2009, as we did not incur any additional expenses relating to the disposition of this subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the three months ended February 28, 2009 was $1,725,000, up from $788,000 in the same period last year. From an operating cash flow perspective, the $1,461,000 net loss we incurred in the first three months of 2009 included a number of non-cash charges including: provision of $336,000 for doubtful accounts receivable, $69,000 for depreciation, $136,000 for accretion of the discount on our convertible notes and $107,000 for stock-based compensation expense, none of which affect cash flow. The more significant operating uses of cash in the first quarter were $307,000 used in growing accounts receivables and inventory and $509,000 used to reduce accounts payable, accrued compensation and accrued expense balances.
In the first three months of 2009, net cash used in investing activities was $10,000, down from $21,000 in the same three month period in 2008. The investing cash use in both periods was for purchases of 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 during the first three months of 2009 was $10,000, down slightly from a net cash use of $12,000 in the first three months of 2008. Uses of cash in financing activities for both periods are principally due to the repayments of mortgage debt by our Medis subsidiary.
On April 11, 2006, we issued $5.25 million of Convertible Notes to 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, we 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. As of February 28, 2009, our outstanding letters of credit totaled $193,000 (152,000). The letters of credit are due to expire in June 2009 and are secured by a certificate of deposit of $251,000 which is included on the balance sheet under "Cash and cash equivalents - restricted."
At February 28, 2009, we had net operating loss carryforwards of approximately $54 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 management's 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 2008, 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. On May 8, 2008, our shareholders approved a reverse split of one-for-seven shares of our common stock . . .
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