Our proprietary, patented technology noninvasively monitors the heart's ability to deliver blood to the body and the amount of fluid in the chest. Our products measure 12 hemodynamic (blood flow) parameters, the most significant of which is cardiac output, or the amount of blood pumped by the heart each minute. Our lead product, the BioZ.com(R), has been cleared by the Federal Drug Administration (FDA) and carries the CE mark. We sell to US physicians and hospitals through our own direct sales force and distribute our products to domestic hospitals and targeted international markets through a strategic alliance with GE Medical Systems Information Technologies (GEMS-IT) and a network of international distributors. In November 1998, Health Care Finance Administration (HCFA), now known as the Center for Medicare & Medicaid Services (CMS), mandated Medicare reimbursement for our BioZ(R) procedures and in January 2001, implemented uniform reimbursement throughout the United States. To date, we have an installed base of over 1,650 ICG systems in over 1,000 physician offices and hospital sites throughout the world.
Our products help physicians assess, diagnose and treat cardiovascular disease, which is the number one killer of adults in the United States. According to the American Heart Association (AHA), approximately one in five Americans have some form of cardiovascular disease. The AHA estimates that over $300 billion was spent in the United States during 2000 as a result of cardiovascular disease and stroke. This figure includes both the direct costs associated with physicians and other professionals, hospital and nursing home services and medication and the indirect costs associated with lost productivity resulting from morbidity and mortality.
Electrocardiogram (EKG) is a widely used noninvasive assessment of the heart. Its limitation is that it only measures the electrical characteristics of the heart. Our ICG technology noninvasively quantifies the mechanical functioning of the heart. Conditions that can interfere with the proper mechanical functioning of the heart include hypertension, congestive heart failure, pulmonary disease, high-risk pregnancy and kidney dysfunction. Our technology complements EKG and supplements information obtained through the five vital signs - heart rate, respiration rate, body temperature, blood pressure and oxygen saturation - immediately, safely and cost effectively. We consider noninvasive cardiac output to be the "Sixth Vital Sign(TM)."
Currently, the primary method used to measure hemodynamic parameters is pulmonary artery catheterization (PAC). The invasive PAC procedure requires hospitalization and involves an incision into the patient's neck or groin region and the insertion of a catheter (plastic tube) through the heart directly into the pulmonary artery. Complications associated with this procedure occur in as many as one in four reported cases and include irregular heartbeats, infection, pulmonary artery rupture and death.
Because of the high risk of complications, physicians generally prescribe PAC only for critically ill patients. In the non-sterile environment of a physician's office or outpatient clinic, PAC is simply unavailable. As a result, in the great majority of situations, the physician seeking to diagnose cardiovascular disease must indirectly assess the patient's hemodynamic status by measuring blood pressure, checking the pulse, looking at neck veins and employing subjective examination techniques that are prone to human error. A compelling need exists for objective, noninvasive measurement tools, such as our BioZ(R) systems.
During ICG monitoring using our BioZ(R) systems, an undetectable electrical signal is sent through our proprietary sensors on the patient's neck and chest. Our sophisticated DISQ(TM) technology and ZMARC(TM) algorithm analyze and record significant hemodynamic parameters. Based on this data, a physician can quickly and safely identify underlying cardiovascular disorder, assess and diagnose, customize and target treatment, monitor the effectiveness of prescribed medications and more accurately identify potential complications.
Our objective is to establish the BioZ(R) product line as a standard of care in cardiovascular medicine. Specifically, our strategy is to:
. accelerate market penetration through our direct sales force;
. broaden our distribution channels through strategic relationships;
. secure additional recurring revenue through enhanced proprietary sensors;
. maintain market leadership through product improvements and extensions;
. target new market opportunities through technology development; and
. develop ICG products for home healthcare.
We were incorporated as a California corporation in 1980 and changed our name in 1993. Our principal executive offices are located at 6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121, and our telephone number is 858-535-0202. Our common stock trades under the symbol CDIC on the Nasdaq-Amex National Market System.
Industry Overview and Company History
Cardiovascular disease is the number one killer of men and women in the United States and in 31 of the 35 countries reporting mortality statistics. In the United States alone, HFCA estimated that there were 60 million physician office visits and over 4 million emergency room visits in 1996 with a primary diagnosis of cardiovascular disease. Our proprietary technology provides medical professionals in the hospital and physician's office with noninvasive access to the objective patient data they need to effectively assess, diagnose and treat congestive heart failure and hypertension, and to evaluate emergency, pacemaker and dialysis patients.
In the hospital setting, the BioZ(R) is a noninvasive, cost-effective and safe alternative to the invasive PAC procedure and may also be used in many situations in which PAC is not feasible. However, advantages of our proprietary technology are not limited to the hospital or the critically ill. We believe that the greatest potential for the BioZ(R) product line is in the new uses the medical community will have for noninvasive hemodynamic measurements. We believe that the total market opportunity is over $5 billion for our BioZ(R) product lines.
We envision expanding the domestic market from the current two million annual invasive PAC procedures to over 72 million annual noninvasive ICG procedures, as summarized in the chart below. Assuming total worldwide procedures are approximately double those in the United States, there would be over 140 million procedures worldwide. These numbers do not include home healthcare monitoring, which we believe would, if implemented, significantly increase demand for our technology.
Potential Annual Noninvasive Monitoring Procedures US Patients
Strategy
Our objective is to establish the BioZ(R) product line as a standard of care in cardiovascular medicine. Our objective will be achieved if and when noninvasive cardiac output, our primary measurement, becomes the Sixth Vital Sign(TM), as oxygen saturation became the fifth vital sign in the mid-1980s. We intend to position ICG technology as a key diagnostic and monitoring tool in assessing and treating congestive heart failure, hypertension, pacemaker, emergency, critically ill, surgical, high-risk obstetric, dialysis, cardiac rehabilitation, immune suppressed and home healthcare patients. Key elements of our corporate strategy include:
Accelerate market penetration through our direct sales force
We intend to expand our direct sales force to capitalize on our first-to-market position in the United States and to further penetrate the physician office market. We believe that a strong direct sales force is best suited to educate the medical community about how the various applications of our technology improve patient outcomes and decrease costs. We currently have 41 direct sales representatives who focus exclusively on our products. During fiscal 2000 we began recruiting clinical sales specialists to supplement our field sales team by enhancing customer understanding, usage and satisfaction. We currently have 9 clinical sales specialists onboard. We believe that the resulting improved device utilization will strengthen customer loyalty and increase our recurring revenue from proprietary sensors.
Broaden our distribution channels through strategic relationships
We intend to establish strategic relationships with major patient monitoring companies, pacemaker manufacturers and other medical products and technology companies to increase the availability of our proprietary technology. We believe that strategic relationships will accelerate market penetration of ICG technology in markets not served by our direct sales team and provide us with access to large installed bases of patient monitoring, cardiology and other complementary medical equipment. We have a strategic relationship with GEMS-IT that provides increased distribution capabilities and collaborative product development programs. We intend to enter into similar arrangements with other patient monitoring companies. We also intend to establish technology-sharing arrangements with leading pacemaker, defibrillator, external enhanced counterpulsation and other medical products and technology companies.
Secure additional recurring revenue through enhanced proprietary sensors
During fiscal 2000 we successfully developed and received FDA 510(k) clearance on our proprietary BioZtect(TM) sensor technology that provides notable improvements in performance and safety. Its unique shape and chemical composition, adhesion characteristics and more user-friendly design optimize signal transmission and detection sensitivity. The new sensor and cable system has a proprietary interface, which promotes the exclusive use of our proprietary sensors with our equipment. As our installed base of BioZ(R) products grows, we expect that the recurring revenue stream from our proprietary sensors could account for as much as 30% to 40% of our total revenue within five years. For the fiscal year ended November 30, 2001, recurring revenue accounted for approximately 10% of our total revenue.
Maintain market leadership through product improvements and extensions
We intend to advance the development of our core algorithms to provide physicians with improved cardiac function measurement capabilities on a broad class of patients. We believe that continued advances in our ICG technology will increase physician usage and loyalty and strengthen our industry position. We will capitalize on our expertise in ICG signal processing and sensor technology to improve system performance in the presence of noise and patient movement. We believe that these improvements will lead to additional applications in cardiac stress testing and ambulatory cardiac function monitoring. We also plan to adapt our current measurement algorithm and to develop a smaller BioZtect(TM) sensor tailored for pediatric patients weighing less than 60 pounds.
Target new market opportunities through technology development
We will continue to focus on new applications for our core technology. Advances in base impedance analysis could be applied in the areas of proper nutrition and weight management, fluid management (including dialysis), oncology, drug noncompliance, HIV patient management and pharmaceutical development and testing. Pharmaceutical companies such as GlaxoSmithKline, Eli Lilly and Co. and Pfizer Inc. are currently using our technology to document the cardiovascular effects of their pharmaceutical agents in both animals and humans. We intend to collaborate with GEMS-IT in basic research in EKG and ICG technology to develop new clinical applications that build upon advances in both technologies. Continued innovation and commercialization of new proprietary products are essential elements in our long-term growth strategy. We also intend to maintain our competitive advantage through acquisitions of new technologies, and to seek additional patents and other proprietary rights as we deem appropriate.
Develop ICG products for home healthcare
We intend to drive a broad utilization of our noninvasive technology. We believe the broadest use of our technology could occur with frequent monitoring of congestive heart failure and hypertensive patients in the home or extended care settings. We intend to pursue strategic relationships with leading technology companies to capitalize on the power of the Internet and the availability of wireless communication to monitor patients in their homes and alternative care settings.
ICG Technology
As EKG technology noninvasively measures the heart's electrical characteristics, our ICG technology makes it possible to measure the heart's mechanical or blood flow characteristics. By using our products, physicians have an easy, noninvasive and cost-effective way to monitor the heart's ability to deliver blood to the body.
ICG technology is based on Ohm's Law and the fact that blood is the most electrically conductive substance in the body. Blood volume and velocity change with each heart beat and result in a change in the electrical conductivity, or impedance, of the chest.
In order to measure this conductivity change, our BioZ(R) products use four dual sensors (two on the neck and two on the chest) to deliver a undetectable, high frequency (70 kHz), low magnitude (4 mA), alternating current through the chest. Use of a high frequency current eliminates the possibility of interference with bioelectrical activity of the heart and brain. Additionally, at a high frequency, there is no sensation to the patient. By setting the current at a constant magnitude, variations in blood volume and velocity in the descending thoracic aorta which cause a proportional voltage change may be measured.
Our BioZ.com(R) ICG product generates the impedance signal with CS2(TM) (Crystal Signal Stabilization) Technology and after the signal travels harmlessly through the body, our proprietary DISQ(TM) technology measures the changes in impedance to the electrical signal. The changes in impedance are then applied to the ZMARC(TM) algorithm to provide the following are the 12 hemodynamic parameters:
*Index means that the results are normalized for body surface area.
Of these 12 parameters, the ones most widely used by physicians are cardiac output, systemic vascular resistance and thoracic fluid content. Another important hemodynamic measure, the speed and strength of the heart's contraction (also known as contractility), may be derived from the velocity index and the acceleration index.
ICG technology measures the change in conductivity, or the inverse, which is impedance, over a change in time and calculates stroke volume, or the volume of blood pumped with each heartbeat. The physician receives a report with vital patient data that allows him or her to customize and optimize treatment.
Some physical and medical conditions may diminish the accuracy of the measurements provided by our products and therefore discourage their use. We believe that inaccuracies most frequently occur in patients who are experiencing severe septic shock, significant pulmonary hypertension, severe aortic valve regurgitation, severe hypertension (where mean arterial pressure is greater than 180), severe irregular ventricular heartbeats or heart rates greater than 180 beats per minute. In addition, there is inadequate data demonstrating the accuracy of our products in patients who are shorter than 47 inches or who weigh less than 66 pounds or more than 342 pounds, as well as in patients who move excessively during the BioZ(R) procedures.
Our Products, Services and Solutions
Pricing
Our stand-alone BioZ(R) systems, as sold to end users, range in list price from $36,710 to $38,710 depending upon configuration. We discount the list prices of our products in some circumstances based primarily upon volume commitments. We also provide discounts on the purchase of demo equipment and to distributors who perform sales and customer service functions for us. The list price for our sensors is $9.95 for the BioZ.com ICG Monitor and $19.95 per set for the BioZ ICG Module. We offer a sensor auto-ship program that allows discounts on sensor purchases based on minimum monthly volume commitments.
BioZ.com(R) ICG Monitor
Our lead noninvasive cardiac function monitoring device features a portable design, transport battery and integrated blood pressure. The BioZ.com(R) system is sold with a pole cart, printer and keyboard for end user data entry and includes a standard five-year warranty. The BioZ.com(R) is compact and features the ability to interface directly with most hospital central monitoring systems.
BioZtect(TM) sensors
We also market disposable sensors designed specifically for use with the BioZ(R) products. With each monitoring session, four dual sensors are utilized. We also make available an optional integrated cable and sensor set with pre-attached lead wires. The integrated cable and sensors are preferred in operating rooms and for patients with infectious diseases. During fiscal 2000, we successfully developed and released our BioZtect(TM) sensors, a new proprietary sensor and cable system that provides enhanced features to our customers and promotes the exclusive use of our proprietary sensors with our equipment.
BioZ(R) ICG Module
The BioZ(R) ICG Module was jointly developed with GEMS-IT. The module integrates our proprietary BioZ(R) ICG technology into GE's Solar patient monitoring systems. We commenced shipments of the BioZ(R) module in May 2001.
BioZ.sim ICG Simulator
The BioZ.sim is a simulation and calibration tool specifically designed to allow end-users and hospital biomedical engineering departments to test and verify the functionality of their BioZ(R) systems.
BioZ(R) system & BioZ.pc(TM) system
The BioZ(R) system is our original noninvasive cardiac ICG monitoring device. It consists of a Pentium-based central processing unit, 15-inch high-resolution medical grade color monitor and keyboard. Included in the central processing unit is our proprietary digital signal processing circuit board and software. The BioZ.pc(TM) system is a customized noninvasive ICG monitoring device that we developed through a collaborative research and development program with Profiles in Health, Inc. Neither of these systems is currently in production.
Zcare(R)
In addition to our standard warranty, we offer extended service agreements, called Zcare(R). The extended service agreement covers hardware and software maintenance beyond the warranty period. Also included in the agreement is a next day loaner unit while a device is under repair, free shipping for the loaner unit and repaired device, and free software upgrades.
Sales and Distribution
The United States medical marketplace consists of two distinct segments: the hospital market and the outpatient market. The outpatient market for BioZ(R) products include physician offices and hospital-based and free-standing outpatient facilities. During fiscal 1997, we established distribution agreements with 17 regional specialty distributors as our representatives in the hospital market. By the end of fiscal 1997, it was apparent that we needed to broaden our sales channels. We decided to add a direct sales force targeted at both the hospital and outpatient markets in the majority of the United States, and we reduced the number of our domestic distributors. During fiscal 2000 we began hiring clinical sales specialists to supplement our field sales team and to enhance customer understanding, usage and satisfaction. We believe that the resulting improved device utilization will strengthen customer loyalty and increase our recurring revenue from proprietary sensors.
During fiscal 1998 and 1999, our direct sales force began to produce an increased percentage of our overall sales in the outpatient market. In contrast to the hospital market, there are few, if any, formal capital equipment budget processes in this market segment, and purchasing decisions can therefore be made more quickly. Consequently, we focused our direct sales force primarily on the outpatient markets and sought an alliance with a hospital-based industry leader to penetrate the hospital market. Currently, we have a direct sales force of 41 focused primarily on the outpatient market.
In October 1999, we announced a strategic alliance with GEMS-IT for the distribution of our products to domestic hospitals with over 100 beds. We now have over 60 of GEMS-IT sales representatives promoting and selling our BioZ.com(R) in larger domestic hospitals. Internationally, we utilize a variety of distributors, including GEMS-IT, to actively promote the BioZ.com(R) in more than 70 countries. We also offer BioZ.buy(TM), our electronic commerce solution that provides the ability to electronically acquire our products, services and information through our company website.
Strategic Relationships
In August 1999, we entered into a strategic relationship with GEMS-IT for exclusive distribution of our BioZ.com(R) to select countries in Europe. In January 2000, we expanded the GEMS-IT distribution agreement to include 18 additional countries including Russia, Egypt, Saudi Arabia and the United Arab Emirates. In September 2000 the agreement was again expanded to include Japan, the worlds second largest health care market. Through GEMS-IT and our other international distributors, we now have representation in over 70 countries throughout Europe, Asia Pacific, Africa, the Middle East, Australia, New Zealand and Latin America. In May 2001, GEMS-IT, GmbH, agreed to provide up to $600,000 of funding over the next two years to support ICG clinical sales specialists in Germany, Italy and Egypt.
In October 1999, we entered into an agreement with GEMS-IT for distribution of the BioZ.com(R) in the domestic hospital market. The agreement gave GEMS-IT exclusive rights through July 2001, to market and sell our BioZ.com(R) in hospitals with over 100 beds, a market in which GEMS-IT has a significant presence. GEMS-IT is widely recognized for its success in introducing new medical technologies, particularly in the areas of diagnostic cardiology, clinical information systems and patient monitoring systems.
During the fourth quarter of fiscal 2000, we entered into an agreement with GEMS-IT for the development of a custom plug-in module for the GEMS-IT Solar 7000 and 8000 Series of bedside monitors. This product was introduced to the market in June 2001 and extends the capabilities of the GEMS-IT Solar product family to provide all of the hemodynamic parameters of the BioZ.com(R) to GEMS-IT's installed customer base of over 30,000 units. The module is built at GEMS-IT's Milwaukee, Wisconsin facility using circuit board assemblies, patient cables and sensors supplied by us. The product is being distributed by the GEMS-IT direct sales force worldwide, and we receive a royalty payment for each module sold. We believe that other patient monitoring companies could benefit from the addition of similar modules to their estimated installed base of over 300,000 modular bedside monitors.
In March 2000, we entered into an agreement to provide BioZ(R) monitors and sensors sets to Profiles in Health, Inc., a privately held California corporation. Under the terms of the agreement, we were to manufacture and sell customized BioZ(R) monitors called BioZ.pc(TM), which would be integrated into the Profiles in Health Proveillance(TM) system. The contract contemplated a three-phase development program during which we would develop and provide to Profiles in Health, ICG components and sensors. Although Profiles in Health, Inc. continues to pursue funding, we established a 100% allowance for the receivables and inventory unique to this entity as their inability to pay became apparent in our fourth quarter of 2000.
In March 2001, we entered into an agreement with The Heart-Lung Associates of America, PC for use of our BioZ ICG technology in their DiTECTM pilot program to enhance the cardiac care of end stage chronic kidney failure patients. The program links kidney disease specialists with cardiologists and aims to significantly reduce cardiac event rates, decrease costs, and improve dialysis patient outcomes. During the latter part 2001 we received FDA 510(k) clearance on a new lower cost BioZ.com that could serve as a cost-effective solution for the dialysis market.
We have implemented various programs and partnerships to enhance our sales force productivity. In April 2001, we entered into a co-promotional agreement with Vasomedical, Inc. which allows our direct sales force, along with Vasomedical's sales force, to jointly market our BioZ.com(R) ICG monitoring systems and Vasomedical's EECP(R) enhanced external counterpulsation systems to physicians and hospitals throughout the United States. That same month, we entered into an agreement with Spacelabs Medical, Inc. for development of an interface using Spacelab's Universal Flexport(R) to integrate and display our ICG technology on their Ultraview Care Network(TM) monitoring system. In August 2001 we launched the Government Market Initiative Program to target and further penetrate Government markets. The program provides tools and incentives to our direct sales force to promote sales to VA hospitals.
Medicare and Other Third-Party Reimbursement
In the outpatient market most medical procedures are reimbursed by a variety of third-party payers, including Medicare and private insurers. CMS (formerly known as HCFA), the governmental body that approves medical diagnosis and treatment for financial reimbursement under Medicare, determines whether to reimburse for a given type of procedure and the dollar amount allowed. In November 1998, CMS mandated Medicare coverage of BioZ(R) procedures on a nationwide basis. This reimbursement approval for our BioZ(R) systems has improved our ability to penetrate the outpatient market, as it provides for national coverage to over 75 million Americans. In November 2000 CMS established national reimbursement pricing for the use of our equipment. In January 2002, the AMA issued a formal Level I CPT code covering our BioZ ICG technology. The current base amount paid by CMS for BioZ ICG is $35.11 per procedure, adjusted geographically based on pre-determined cost of living factors.
In the US hospital market the financial and healthcare cost containment pressures resulting from per-capita compensation techniques required by health maintenance organizations and diagnosis-related groups, are driving medical departments to decrease costs. A managed care system involving capitation rewards healthcare providers who utilize the most cost-effective methods available in order to maintain per-patient costs within the monthly fees. When used instead of PAC, our products could reduce direct hospital costs by an aggregate of $600 and total hospital costs by an average of $13,600. As a result, we believe a financial incentive exists, independent of third-party reimbursement circumstances, for hospitals to purchase and use our products.
Marketing
Until recently, comprehensive hemodynamic information has been available only in acute care settings, such as an intensive care unit or operating room, through the use of PAC. The BioZ(R) systems make obtaining and assessing this type of information simple, fast, cost-effective, safe, continuous and painless. For these reasons, the utilization of noninvasive ICG technology is expanding in both hospital and outpatient environments.
Our primary prospects in the outpatient market include cardiologists, internal medicine physicians and family practitioners caring for congestive heart failure, hypertension and pacemaker patients. Patients in the United States who may benefit from our technology include the 50 million hypertension patients, five million congestive heart failure patients, over one million pacemaker patients, 20 million emergency
patients and many patients requiring fluid management. Congestive heart failure-related expenditures exceeded $40 billion in 1998, more than any other illness.
Our marketing strategy is designed to:
. increase physician and hospital personnel knowledge of ICG technology;
. demonstrate the cost savings of providing ICG monitoring to patients;
. demonstrate the ability of the BioZ(R) systems to assist physicians in the objective identification and appropriate pharmacological treatment of congestive heart failure, hypertension and fluid management patients;
. show the ability of the BioZ(R)systems to assist physicians in the optimization of pacemakers;
. demonstrate cost savings through more efficient care and reimbursement through CMS-mandated Medicare and private insurers; and
. educate physicians and hospital staff of the importance of hemodynamics in the treatment of patients who would normally not be monitored with a PAC due to practice setting, costs and complications.
In addition, within the hospital setting, our marketing strategy is to emphasize the benefits of our noninvasive technology over the invasive PAC procedure.
We believe that acceptance of our products within the outpatient and hospital markets will lay the foundation for the utilization of ICG technology in the home healthcare market which will allow patients with chronic illnesses, such as congestive heart failure, to monitor their hemodynamic status simply and inexpensively and to transmit this information, via telephone or Internet, to their physicians on a regular basis. We believe that this "telemedicine" application has the potential to alert the physician effectively and efficiently to any changes in status, the need to adjust medications or patient noncompliance with prescribed treatment.
Our marketing promotion strategy is based on key medical conference participation, facsimile and mail direct response programs, select medical journal advertising and product and clinical education literature.
We actively support research utilizing the BioZ(R) systems because it may provide further clinical validation for ICG. We seek to have each study published in a peer-reviewed journal or presented at a major medical conference. Clinical publications and presentations at major medical conferences provide us with the exposure necessary to establish credibility for ICG technology and the BioZ(R) systems.
Research and Development
Our research and development team has extensive experience in the areas of ICG, biological signal processing, hardware and software development and regulatory compliance. The team is responsible for on-going product engineering, new product development and basic research into ICG technology and additional noninvasive monitoring applications.
To supplement our engineering staff, we utilize Rivertek Medical Systems, Inc., located in Minneapolis, Minnesota, as an integral part of our research and development team. Rivertek serves as an engineering consulting firm for medical device manufacturers, including Guidant Corporation and Medtronic, Inc., as well as emerging medical technology companies. Dennis Hepp, our chief technology officer, founded Rivertek in 1988. Rivertek employs 17 full time medical hardware, software and biomedical engineers.
Clinical Studies
Our research and development team participates in monitoring and analysis of company-sponsored clinical trials, for which we employ clinical research specialists. Each of these individuals has a strong clinical background and is responsible for monitoring clinical studies and assisting in research and customer training.
Previous generation technology
More than 80 research papers on ICG technology have been published since 1993. In general, these studies reported favorable results when comparing cardiac output measurements with those of other techniques, such as PAC.
Previous generation technology worked reasonably well in a select group of patients. However, significant limitations on the technology became evident when monitoring ventilated patients and those with increasing heart rates, high heart rates, abnormal heartbeats, high respiration rates and pacemakers. These limitations related to both hardware and software inadequacies. As a result of intense focus and concerted effort, combined with advances in computer processing power, we have addressed these limitations by improving the electronics and processing as well as the algorithms.
The BioZ(R) Systems
We are committed to supporting well-designed clinical research studies utilizing ICG technology, several of which are currently in process. Studies which are of most importance to us are those which demonstrate validity, reproducibility, clinical utility and cost-effectiveness. The results of several major studies addressing each of these areas have been released with positive results. In May 2001, the results of a significant 100+ patient Mayo Clinic study was released at the American Society of Hypertension meeting held in San Francisco. The study demonstrated a 65% superiority in effectively treating previously-uncontrolled hypertension patients when our BioZ ICG was used as compared to traditional management by high blood pressure specialist physicians. In the study, one-half of the 104 resistant (uncontrolled) hypertension patients When the Company's BioZ ICG was utilized were treated with prescribed drugs based on traditional hypertension specialist evaluation and one-half of the patients were treated with prescribed drugs based upon the BioZ's hemodynamic data. The BioZ augmented-patient group reached goal (140/90 mm Hg) blood pressure 65% more often than the patients being treated without BioZ data. The study's investigators concluded "noninvasive hemodynamic management achieved superior blood pressure levels and control rates, when compared to management by experienced hypertension clinicians."
In September 2001 we announced the results of a significant ICG clinical study presented at the Fifth Annual Heart Failure (HFSA) Scientific Meeting in Washington, D.C. The Study, presented by researchers from the Iowa Heart Center, demonstrated CardioDynamics ICG technology's benefit in caring for pacemaker patients. Optimization of the pacemaker setting using the BioZ ICG benefited 89% of all patients in the Study. Small changes in pacemaker settings have the potential to create dramatic improvement in the heart's ability to deliver blood to the body while reducing the amount of effort required. The Study demonstrates the value of BioZ's noninvasive measurements to document possible improvement in heart function for patients being evaluated for a pacemaker. The results confirmed that benefit could be possible and allows identifying 'the best' setting for the pacemaker. Based on the results of this study it appears that ICG technology may be more useful than the commonly used echocardiographic measurements.
In addition to the completed studies, we are involved in a number of additional studies:
PREDICT - Prospective Evaluation and Identification of Cardiac Decompensation in Heart Failure by Impedance Cardiography Test. We have 21 research sites participating in this company-sponsored study and currently have 208 patients enrolled. The study design of PREDICT includes serial blinded measurements of ICG that are performed at two week intervals for 26 weeks. All patients are managed according to the judgment of physicians and nurses responsible for the patients care, who are not aware of the ICG data. The statistical analyses will involve determining if changes in specific ICG variables reliably precede the development of worsening heart failure. We have approximately 100 patients who have now completed the 6 months of monitoring.
ESCAPE BIG - Evaluation Study of Congestive Heart Failure and Pulmonary Artery Catheterization Effectiveness (ESCAPE) Bio-Impedance Cardiography in Advanced Heart Failure (BIG). We are participating as a substudy with a primary objective of evaluating how accurately hemodynamics parameters obtained from ICG predict clinical outcomes and to evaluate the relationship between hemodynamic data derived from ICG with hemodynamic data obtained from invasive monitoring. There are currently 56 patients enrolled in this substudy.
ED-IMPACT - Impedance Cardiography-Aided Assessment Changes Therapy in Emergent Dyspnea. This study is just getting underway. The primary endpoint will be the rate of change in diagnosis and treatment following the addition of BioZ data to the physician's initial clinical impression and therapeutic plan. Secondary endpoints will include an analysis of the changes in cost that resulted as a consequence of learning the hemodynamic data. We'll also be looking at ICG data corresponding to initial chest x-ray, echocardiography, and BNP (B-type Natriuretic Peptide) diagnostic results.
Medical Advisory Board
We have established a distinguished medical advisory board consisting of 22 physicians, many of whom are affiliated with prestigious universities and well-known medical institutions throughout the United States such as Stanford University School of Medicine, Cleveland Clinic, Scripps Clinic, University of California, San Diego, and Baylor College of Medicine, Houston, Texas. Our members, who have expertise in cardiology, electrophysiology, anesthesiology, hypertension, pulmonary and critical care, internal medicine, heart failure and emergency medicine, are as follows:
. William T. Abraham, M.D. is director of the Heart Failure & Cardiac Transplantation Department and the University of Kentucky Medical Center in Lexington, Kentucky.
. Peter Alagona, Jr., M.D. is a private practice cardiologist at Health Centers of Excellence in Tampa, Florida.
. Peter H. Belott, M.D. is a board certified internist and cardiologist specializing in cardiac pacing and electrophysiology in San Diego, California.
. Anthony N. DeMaria, M.D. is chief of cardiovascular medicine for the cardiology division of the University of California, San Diego in San Diego, California.
. Nicholas V. Diaco, M.D. has served as chairman of our medical advisory board since February 1995. He is the director of the coronary care unit and the heart catheterization laboratory at St. John's Hospital and Health Center in Santa Monica, California.
. Barry H. Greenberg, M.D. is the director of the heart failure/transplant cardiology program at University of California, San Diego Medical Center in San Diego, California.
Medical Advisory Board - (Continued)
. James Heywood, M.D. is the medical director of the cardiomyopathy program at Loma Linda University Medical Center in Loma Linda, California.
. Meldon C. Levy, M.D. is director of the cardiac noninvasive laboratory and vice chairman, governing board, of the Century City Hospital, Los Angeles, California.
. William C. Maguire, M.D., Ph.D. has a private practice in critical care and pulmonary disease and is on the staff of Grossmont and Alvarado Hospitals, San Diego, California.
. Srinivasm Murali, M.D. is associate professor of medicine, director of transplant cardiology of the heart failure/transplantation unit of UPMC Health System located in Pittsburgh, Pennsylvania.
. Loi Phi Nguyen, M.D. is Chief of Cardiology at West Houston Hospital in Houston, Texas.
. Steven E. Nissen. M.D. is vice-chariman, department of cardiology and director of clinical cardiology at the Cleveland Clinic in Cleveland, Ohio
. Frank Peacock, M.D. is a physician in the emergency department of the Cleveland Clinic in Cleveland, Ohio.
. W. Scott Sageman, M.D. is a physician in private practice in critical care and pulmonary medicine at the Community Hospital of Monterey Peninsula in Monterey, California.
. Richard A. Schatz, M.D. is research director of cardiovascular interventions at the heart, lung and vascular center at Scripps Clinic and Research Foundation in La Jolla, California.
. John S. Schroeder, M.D. is the chief of the cardiovascular medicine clinic and a professor of medicine at Stanford University School of Medicine in Stanford, California.
. Marc A. Silver, M.D. is the director of the heart failure institute and the cardiovascular disease fellowship program at Christ Hospital and Medical Center in Oak Lawn, Illinois.
. Bruce D. Spiess, M.D. is a professor, chief of cardiothoracic anesthesia and director of clinical research at the Medical College of Virginia Commonwealth University in Richmond, Virginia.
. John E. Strobeck, M.D., Ph.D. is a member of the executive committee and co-founder of the Heart Failure Society of America and medical director of the Heart-Lung Center in Hawthorne, New Jersey.
. Guillermo Torre-Amione, M.D., Ph.D. is an assistant professor of medicine and medical director at Baylor College of Medicine in Houston, Texas.
. Richard F. Wright, M.D. is the research director at St. John's Pacific Heart Institute in Santa Monica, California.
. Clyde W. Yancy, Jr., M.D. is the director of the congestive heart failure program and medical director at the University of Texas Southwestern Medical Center in Dallas, Texas.
Our medical advisory board provides guidance regarding clinical trials, technological improvements and potential uses for our products. Members of the medical advisory board receive reimbursement for their expenses in attending company-sponsored meetings and, in some cases, receive consulting fees for time spent working on our behalf. No fees were paid to the members during fiscal 2001, 2000 or 1999 services on our medical advisory board. However, in some cases, members receive options to purchase shares of our common stock for participating in meetings and studies.
Manufacturing
We are licensed as a healthcare device manufacturer by the Food and Drug Branch of the California Department of Health Services, which is the State of California equivalent of the FDA, and operate under the FDA Good Manufacturing Practice regulation.
In our facility our production process for the BioZ(R) monitors consists primarily of final assembly, integration and testing of standard and custom components. We currently outsource to a third party the production of our BioZtect(TM) sensors and patient boards to qualified subcontractors, who have met our supplier certification process and are placed on an approved vendor list.
We have implemented quality procedures and documentation required for successful International Organization for Standardization (ISO) 9001 certification. In June 1998, we received ISO 9001 and EN 46001 quality certification for developing and marketing medical devices.
We maintain a quality-assurance program covering our manufacturing operations. Suppliers of purchased components are required to meet stated specifications. We certify suppliers prior to use by conducting audits and product inspections. We engage in ongoing evaluations of the performance of our suppliers by evaluating the results of inspections and tests as well as the timeliness of product deliveries. We employ numerous quality-assurance procedures during our in-house manufacturing processes to ensure that our finished products meet our specifications. Quality assurance procedures include operator training, process validation, equipment calibration, inspection and testing. All manufacturing procedures and processes are formally approved and updated using established revision control procedures. Documentation of in-house and final testing results is maintained in device history records for every unit. We maintain an ongoing post-sale performance-monitoring program.
Warranty and Service
Our systems come with a standard five-year, parts and labor warranty commencing at the date of shipment. When warranty repairs are necessary, we generally perform them at our headquarters. In some cases, our distributors perform repairs in authorized service centers. We also provide field clinical sales specialists as necessary, as well as 24-hour on-call technical support. In addition to the standard warranty, we offer extended service agreements, called Zcare(R), for hardware and software maintenance beyond the warranty period. We also service equipment on a time and materials basis.
Competition
Direct competition
We are aware of three domestic and two international manufacturers of ICG monitors. Since all five companies are privately held, sales and financial figures for these competitors are not available. We believe that our BioZ(R) products provide the most advanced ICG monitoring and commercially attractive designs, at prices that are competitive. Thus far, we have not observed sales and marketing efforts by our competitors in the market place.
PAC
Also known as thermodilution, right heart catheterization or Swan-Ganz(TM) catheterization, the PAC procedure was introduced in the early 1970's. Despite its limitations, costs and risks, PAC remains the most commonly used technology for monitoring hemodynamic status. Medical Data International estimates that PAC procedures are used nearly 2 million times per year worldwide. The estimated cost of PAC to the US healthcare system in 1997 was $2 billion for the cost of the catheters and their insertion and $15 billion per year for the cost of complications arising from the procedure. Edwards Lifesciences, Abbott Laboratories and Datex-Ohmeda produce the majority of right heart catheters used in the United States.
PAC is an invasive procedure involving an incision into a patient's neck or groin region and the insertion of a catheter (plastic tube) through the vascular system and through the heart directly into the pulmonary artery. Complications associated with this procedure occur in as many as one in four reported cases and include irregular heartbeats, infection, pulmonary artery rupture and death. Additionally, a September 1996 study published in the Journal of the American Medical Association (JAMA) determined that the use of PAC to monitor cardiac output significantly increased the risk of death in critically ill patients. This study, which examined data from 5,735 intensive-care patients treated at five US medical centers, reported that patients who underwent PAC had a 21% higher risk of death within 30 days of discharge, as compared to those who did not undergo the procedure. The importance of this finding is underscored by the fact that patients in both groups were matched for disease severity and prognosis.
Another significant drawback in the use of PAC is cost. The PAC procedure requires a hospital to allocate valuable resources in terms of an intensive care unit bed, a cardiac catheterization laboratory or operating room, highly skilled medical personnel and expensive equipment to obtain non-continuous hemodynamic data. According to the JAMA study, the mean cost of the hospital stay for critically-ill patients having a PAC was $13,600 greater than the $35,700 cost for similar critically-ill patients who did not undergo a PAC.
Many patients who might otherwise benefit from hemodynamic monitoring are excluded presently because the risks and costs associated with PAC often outweigh the potential benefits. ICG technology eliminates PAC-caused complications and death, lowers costs, reduces procedure time, expands clinical applications and offers immediate availability of vital, real-time and continuous hemodynamic data.
Echocardiography
Echocardiography (echo) is a medical diagnostic tool utilizing ultrasound frequency waves to detect anatomical abnormalities of the heart and blood vessels. Echo technology was developed during the 1970's and has advanced through the years with the addition of sophisticated electronics and digitalization for acquisition of better images. A continuous wave suprasternal Doppler echo measures cardiac output noninvasively by placing a Doppler transducer on the chest, aiming it toward the ascending aorta and measuring aortic blood flow velocity. Specifically, echo measures the aortic diameter and the movement of red blood cells to determine the velocity and direction of blood flow to calculate stroke volume and thus calculate cardiac output.
Limitations in measuring cardiac output via echo include:
. inconsistency in images and in the data generated due to differences in technician skill and experience, patient size and disease state; and
. difficulty in procuring images in patients with evidence of pulmonary disease, tracheotomies, chest wounds or obesity.
In addition, echo is a time-consuming procedure that typically requires 30-45 minutes, and in some patients, reliable, accurate images simply cannot be obtained for unknown reasons.
Trans-esophageal echo
Trans-esophageal echo has been developed in recent years to obtain closer images of the heart. It is useful in patients for whom examination from the usual position is technically impossible and for hospitalized patients undergoing cardiac surgery. Trans-esophageal echo is performed with the ultrasound transducer placed invasively in the esophagus through the mouth. Although this procedure enables more direct, accurate images of the heart, disadvantages include its invasive nature, increased patient discomfort and the requirement for patient sedation to promote procedure tolerance. In addition, patient airway complications may result, causing the need for available emergency equipment, such as oxygen, intubation equipment and EKG monitoring. The procedure is customarily performed with several attendants, including an echo technician, a nurse and a physician.
Direct Fick
Direct Fick was the original method conceived in the late 1800's to measure cardiac output. It is based on calculating the oxygen difference between the arterial and venous blood, along with oxygen inhalation and expiration. The Direct Fick method is seldom used because it is time consuming, costly and complicated. A variation of the Direct Fick method, called Fick Partial Re-breathing, was introduced in late 1998 to the hospital surgical market. Fick Partial Re-breathing uses carbon dioxide instead of oxygen to measure cardiac output. The Fick Partial Re-breathing method is limited to patients who are mechanically ventilated, which severely restricts the number of patients who are candidates for the procedure. In addition, lack of CMS-mandated reimbursement creates a barrier for adoption by the medical community.
Intellectual Property
Our success will, to some extent, depend on our ability to maintain patent protection for our products and processes, to preserve our trade secrets and proprietary technology and to operate without infringing upon the patents or proprietary rights of others. Currently we hold two United States patents that will expire in 2006 and 2009. These existing patents were issued prior to the re-engineering of our products to incorporate digital signal processing. Our research department has developed new technologies for which we have filed six patent applications. We also possess proprietary software, which we have elected not to disclose through patents. We may in the future file new patent applications covering modifications to our products and algorithms.
Government Regulation
In November 1996, we received 510(k) clearance from the FDA to market the BioZ(R) system. In September 1997, the FDA granted 510(k) clearance to market the BioZ(TM) Portable and to implement our proprietary DISQ(TM) technology into redesigned monitors. DISQ(TM) provides improved measurement of impedance waveforms through enhanced digital signal processing and automatic calibration.
In March 1998, we received 510(k) marketing clearance for our BioZ.com(R) monitoring system. The BioZ.com(R) incorporates our ZMARC(TM) algorithm, which allows the system to sense and modulate values on patients with over-compliant or under-compliant aortas.
Our products and activities are subject to extensive, ongoing regulation by the FDA and other governmental and foreign regulatory agencies. Under the Federal Food, Drug and Cosmetic Act, the FDA regulates the clinical testing, manufacture, labeling, packaging, marketing, distribution and record keeping for medical devices. Delays in receipt of, or failure to obtain or maintain, regulatory clearances
and approvals, or any failure to comply with regulatory requirements, could delay or prevent our ability to market our product line.
Before a new device may be introduced or marketed, the manufacturer generally must obtain either FDA 510(k) clearance or approval of a pre-market approval application. FDA clearance or approval may entail an expensive, lengthy and uncertain process. We have received a marketing clearance for the BioZ(R) system, the BioZ.pc(TM) and the BioZ.com(R). These clearances are nevertheless subject to continued FDA audits and may be rescinded if we change the design of our technology. Further, we plan to submit additional new products for FDA clearance or approval in the future. It is possible that our future products may not gain FDA clearance or approval in a timely fashion, or at all.
We are also subject to routine inspection by the FDA and state agencies, such as the California Department of Health Services, for compliance with good manufacturing practice requirements, medical device reporting requirements and other applicable regulations. Violation or alleged violation of these regulations may result in government action ranging from warning letters to criminal prosecution. Companies who violate these regulations are also subject to penalties of up to $500,000.
The Federal Food, Drug and Cosmetic Act requires that medical devices be manufactured in accordance with good manufacturing practice requirements. Good manufacturing practice requirements specify, among other things, that:
. the manufacturing process be regulated and controlled by the use of written procedures;
. the ability to produce devices which meet the manufacturer's specifications be validated by the extensive and detailed testing of every aspect of the process; and
. deficiencies in the manufacturing process or in the products produced be investigated and detailed records kept.
Manufacturing facilities are subject to FDA inspection on a periodic basis to monitor compliance with current good manufacturing practice requirements. Labeling and promotional activities are regulated by the FDA and, in some circumstances, by the Federal Trade Commission. Modifications or enhancements that could significantly affect the safety or effectiveness of a device or that constitute a major change to the intended use of the device require a new 510(k) submission. If the FDA requires us to submit a new 510(k) notice for any product modification, even one that addresses device performance issues, we may be prohibited from marketing the modified product until the 510(k) notice is cleared by the FDA.
Laws and regulations regarding the manufacture, sale and use of medical devices are subject to change and depend heavily on administrative interpretations. Future changes in the regulations or interpretations made by the FDA or other regulatory bodies may have retroactive effect and may adversely affect us.
In order to sell our products within the European community, we must comply with the European Commission's medical device directive. In late 1998 we received authorization from TUV Rhineland of North America to place the CE mark on our BioZ.com(R). The CE mark is recognized worldwide as an essential European regulatory approval and enables us to expand our sales and distribution of the BioZ.com(R) throughout Europe. Future regulatory changes could limit our ability to use the CE mark, and any new products we develop may not qualify for the CE mark. If we fail to obtain authorization to use the CE mark or lose this authorization, we will not be able to sell our products in the European community. In December 2001, we had our annual compliance review and we passed without any significant issues. In May 2000, we received approval from the State Drug Administration of the People's Republic of China and in November 2000, we received a Canadian Medical Device License.
Employees
As of February 15, 2002, we had 122 employees, two of which are considered part-time. Of this number, 63 are in sales and marketing, 21 are in manufacturing, 13 are in research and development, and the balance are in management or administration.
RISK FACTORS
We depend upon on our BioZ(R) product line, the market acceptance of which is in its early stages.
Our future is dependent upon the success of the BioZ(R) product line and similar products that are based on the same core technology. The market for these products is in a relatively early stage of development and may never fully develop as we expect. The long-term commercial success of the BioZ(R) product line requires widespread acceptance of our products as safe, efficient and cost-effective. Widespread acceptance would represent a significant change in medical practice patterns. In the past, some medical professionals have hesitated to use ICG products because of limitations experienced with older, analog-based monitors. Invasive procedures, such as PAC, are generally accepted in the medical community and have a long history of use.
We have sponsored, and will continue to sponsor or conduct clinical trials. We cannot be certain that clinical trials will be completed, that they will have a positive outcome or that a positive outcome in these trials will be sufficient to promote widespread acceptance of our products within the medical community.
Technological change is difficult to predict and to manage.
We face the challenges that are typically faced by companies emerging from the development phase. Our product line has required, and any future products will require, substantial development efforts and compliance with governmental clearance or approval requirements. We may encounter unforeseen technological or scientific problems that force abandonment or substantial change in the development of a specific product or process.
We must maintain and develop strategic relationships with third parties to increase market penetration of our product lines.
We distribute our products to domestic hospitals and targeted international markets through our strategic alliance with GEMS-IT. We intend to enter into similar agreements with other major patient monitoring companies and to establish technology partnerships with pacemaker and other medical product and technology companies. Widespread acceptance of our BioZ(R) products is dependent on our establishing and maintaining these strategic relationships with third parties and on the successful distribution efforts of third parties.
Many aspects of our relationships with third parties, and the success with which third parties promote distribution of our products, are beyond our control. We may be unsuccessful in maintaining our existing strategic relationships and in identifying and entering into future development and distribution agreements with third parties.
Our success depends in part upon the availability of third-party reimbursement at adequate price levels.
Our success will depend in part on the availability of adequate reimbursement from third-party healthcare payers, such as Medicare, private health insurers and managed care organizations. Third-party payers increasingly challenge the pricing of medical products and services. Third-party payers may not cover the cost of a device and related services, or they may place significant restrictions on the circumstances in which coverage will be available. In addition, reimbursement may not be at or remain at price levels adequate to allow medical professionals to realize an appropriate return on the purchase of our products.
We depend on management and other key personnel.
We dependent on a limited number of key management and technical personnel. The loss of one or more of our key employees may hurt our business if we are unable to identify other individuals to provide us with similar services. We do not maintain "key person" insurance on any of our employees. In addition, our success depends upon our ability to attract and retain additional highly qualified sales, management, manufacturing and research and development personnel. We face intense competition in our recruiting activities and may not be able to attract or retain qualified personnel.
We depend on Rivertek Medical Systems and other third parties for development and manufacturing services.
Our strategy for development and commercialization of some of our products depends upon entering into various arrangements with third parties and upon the subsequent success of these parties in performing their obligations. We may not be able to negotiate acceptable arrangements in the future, and our existing arrangements may not be successful. We rely on contracted development services, particularly from Rivertek Medical Systems, Inc. Also, we currently assemble our products from components manufactured by a limited number of manufacturers. Therefore, we are dependent on component and subassembly manufacturers. If we experience a termination, modification or disruption of any of our development or manufacturing arrangements, we may be unable to deliver products to our customers on a timely basis, which may lead to customer dissatisfaction and damage to our reputation.
We may not have adequate intellectual property protection.
Our patents and proprietary technology may not be able to prevent competition by others. In addition, in the future our products may be found to infringe upon the rights of others. From time to time, we have received communications from third parties asserting that features of some of our products may infringe on the intellectual property rights of others. Any claims resulting in intellectual property litigation, whether defensive or offensive, would have no certain outcome other than to drain our resources.
The validity and breadth of claims in medical technology patents involve complex legal and factual questions. Future patent applications may not be issued, the scope of any patent protection may not exclude competitors, and our patents may not provide competitive advantages to us. Our patents may be found to be invalid, and other companies may claim rights in or ownership of the patents and other proprietary rights held or licensed by us. Also, our existing patents may not cover products that we develop in the future. Moreover, when our patents expire, the inventions will enter the public domain. See "Business - Intellectual Property."
Since patent applications in the United States are maintained in secrecy until patents are issued, our patent applications may infringe patents that may be issued to others. If our products were found to infringe patents held by competitors, we may have to modify our products to avoid infringement, and it is possible that our modified products would not be commercially successful.
We face competition from other companies and technologies.
We compete with other companies that are developing and marketing noninvasive hemodynamic monitors. We are also subject to competition from companies that support invasive technologies. Many of these companies have more established and larger marketing and sales organizations, significantly greater financial and technical resources and a larger installed base of customers than we do. The introduction by others of products embodying new technologies and the emergence of new industry standards may render our products obsolete and unmarketable. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the
intended purposes of our products. Accordingly, the life cycles of our products are difficult to estimate. To compete successfully, we must develop and introduce new products that keep pace with technological advancements, respond to evolving consumer requirements and achieve market acceptance. We may be unable to develop new products that address our competition.
Our business plan contemplates an income stream from sales of disposable sensors that are compatible with an installed base of our monitors. We may be subject to price competition from other sensor manufacturers whose products are also compatible with our monitors. To mitigate this we successfully developed proprietary sensor technology that provides enhanced features to our customers and promotes the exclusive use of our proprietary sensors with our equipment.
The current widespread acceptance of PAC, and the lack of widespread acceptance of noninvasive technologies like ours, is an important competitive disadvantage that we must overcome. In addition, our current and potential competitors may establish cooperative relationships with large medical equipment companies to gain access to greater research and development or marketing resources. Competition may result in price reductions, reduced gross margins and loss of market share.
The cost and availability of power in the State of California is subject to uncertainty.
In late 2000 and continuing in 2001, the State of California has been subject to a deterioration in the ability of major utilities to provide energy for the State's needs. The crisis has resulted in "rolling blackouts" where certain areas are not provided with any electricity for several hours. To date, while our facilities have been subject to intermittent power outages, the most immediate impact has been the significant increase in power rates for most users, including us. In addition, the major utility providers are purchasing power on a "spot" basis. The cost of such purchases has exceeded their ability to fully collect the increases from their customers. Any future interruption in power or further increases in power costs could delay production or increase our operating costs and could have a material adverse effect on our operations.
We have no experience with home healthcare.
We intend to enter the home healthcare market through pursuit of strategic relationships with other parties. We have not concluded any agreements or understandings with any third parties, and we may not be able to enter into any arrangements on terms satisfactory to us. Even if we are successful in negotiating acceptable arrangements with third parties, the parties may not perform their obligations to us for reasons beyond our control. If we are not able to negotiate arrangements with other parties to implement our home healthcare strategy, or if such arrangements, once negotiated, are not successful, we will not be able to meet our business objectives in this area.
We have a history of losses and may experience continued losses.
We have experienced losses every year. These losses have resulted because we have expended more money in the course of researching, developing and enhancing our technology and products and establishing our sales, marketing and administrative organizations than we have generated in revenues. We expect that our operating expenses will increase substantially in the foreseeable future as we increase our sales and marketing activities, expand our operations and continue to develop our technology. It is possible that we will never achieve or sustain the revenue levels required for profitability.
We may need additional capital, which may be unavailable.
The commercialization of our current product line and the development and commercialization of any additional products may require greater expenditures than expected in our current business plan. Our capital requirements will depend on numerous factors, including:
. our rate of sales growth--fast growth may actually increase our need for additional capital to hire additional staff, purchase additional component inventories, finance the increase in accounts receivable and supply substantial support services;
. our progress in marketing-related clinical evaluations and product development programs, all of which will require additional capital;
. our receipt of, and the time required to obtain, regulatory clearances and approvals--the longer regulatory approval takes, the more working capital we will need to support our regulatory and development efforts in advance of sales;
. the level of resources that we devote to the development, manufacture and marketing of our products--any decision we make to improve, expand or simply change our process, products or technology will require increased funds;
. facilities requirements--as we grow we may need additional manufacturing, warehousing and administration facilities and the costs of the facilities would be borne long before any increased revenue from growth would occur;
. market acceptance and demand for our products--although growth may increase our capital needs, the lack of growth and continued losses would also increase our need for capital; and
. financing strategies--our attempt to accelerate the otherwise lengthy purchasing processes of hospitals by offering leasing programs as an alternative to outright purchasing and by providing purchasers with extended payment terms and financing options will consume additional capital.
We may be unable to predict accurately the timing and amount of our capital requirements. We may be required to raise additional funds through public or private financing, bank loans, collaborative relationships or other arrangements earlier than expected. It is possible that banks, venture capitalists and other investors may perceive our capital structure, our history of losses or the need to achieve widespread acceptance of our technology as too great a risk to bear. As a result, additional funding may not be available on attractive terms, or at all. If we cannot obtain additional capital when needed, we may be forced to agree to unattractive financing terms, to change our method of operation or to curtail our operations.
We may not be able to manage growth.
If successful, we will experience a period of growth that could place a significant strain upon our managerial, financial and operational resources. Our infrastructure, procedures and controls may not be adequate to support our operations and to achieve the rapid execution necessary to successfully market our products. Our future operating results will also depend on our ability to expand our direct sales force and our internal sales, marketing and support staff. If we are unable to manage future expansion effectively, our business, results of operations and financial condition will suffer, our senior management will be less effective, and our revenues and product development efforts may decrease.
Our quarterly operating results frequently vary due to factors outside our control.
We have experienced and expect to continue to experience fluctuations in quarterly operating results as a result of a number of factors. We cannot control many of these factors, which include the following:
. the timing and number of new product introductions;
. the mix of sales of higher and lower margin products in a quarter;
. the market acceptance of our products;
. development and promotional expenses relating to the introduction of new products or enhancements of existing products;
. product returns;
. changes in pricing policies by us and our competitors;
. the timing of orders from major customers and distributors; and
. delays in shipment.
For these reasons, you should not rely on period-to-period comparisons of our financial results as indications of future results.
We may not continue to receive necessary FDA clearances or approvals.
Our products and activities are subject to extensive, ongoing regulation by the Food and Drug Administration and other governmental authorities. Delays in receipt of, or failure to obtain or maintain, regulatory clearances and approvals, or any failure to comply with regulatory requirements, could delay or prevent our ability to market our product line.
We may not receive approvals by foreign regulators which are necessary for international sales.
Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary from country to country. If we, or our international distributors, fail to obtain or maintain required pre-market approvals or fail to comply with foreign regulations, foreign regulatory authorities may require us to file revised governmental notifications, cease commercial sales of our products in the applicable countries or otherwise cure the problem. Such enforcement action by regulatory authorities may be costly.
In order to sell our products within the European community, we must comply with the European community's medical device directive. The CE marking on our products attests to this compliance. Future regulatory changes may limit our ability to use the CE mark, and any new products we develop may not qualify for the CE mark. If we lose this authorization or fail to obtain authorization on future products, we will not be able to sell our products in the European community.
We do not know the effects of healthcare reform proposals.
The healthcare industry is undergoing fundamental changes resulting from political, economic and regulatory influences. In the United States, comprehensive programs have been proposed that seek to increase access to healthcare for the uninsured, control the escalation of healthcare expenditures within the economy and use healthcare reimbursement policies to balance the federal budget.
We expect that Congress and state legislatures will continue to review and assess healthcare proposals, and public debate of these issues will likely continue. We cannot predict which, if any, of such reform proposals will be adopted and when they might be adopted. Other countries also are considering healthcare reform. Significant changes in healthcare systems could have a substantial impact on the manner in which we conduct our business and could require us to revise our strategies.
We are subject to product liability claims and product recalls that may not be covered by insurance.
The nature of our business exposes us to risks of product liability claims and product recalls. Medical devices as complex as ours frequently experience errors or failures, especially when first introduced or when new versions are released. For example, we voluntarily recalled 43 units of our new BioZ.comII's from purchasers in December due to performance issues identified in conjunction with early users of this product. All of the recalled units were replaced with BioZ.com's and we have retrofitted the recalled units to address the performance issues. Our products are sometimes used in procedures where there is a high risk of serious injury or death. These risks will exist even with respect to those products that have received, or may in the future receive, regulatory clearance for commercial sale.
We did not carry product liability insurance during some periods before May 15, 1995. We currently maintain product liability insurance at $20,000,000 per occurrence and $20,000,000 in the aggregate. Our product liability insurance may not be adequate. In the future, insurance coverage may not be available on commercially reasonable terms, or at all. In addition, product liability claims or product recalls could damage our reputation even if we have adequate insurance coverage.
Our common stock is subject to price volatility.
The market price of our common stock has been and is likely to continue to be highly volatile. Our stock price could be subject to wide fluctuations in response to various factors beyond our control, including:
. quarterly variations in operating results;
. announcements of technological innovations, new products or pricing by our competitors;
. changes in, or failure to meet, financial estimates of securities analysts;
. the rate of adoption by physicians of ICG technology in targeted markets;
. the timing of patent and regulatory approvals;
. the timing and extent of technological advancements;
. results of clinical studies;
. the sales of our common stock by affiliates or other shareholders with large holdings; and
. general market conditions.
Our future operating results may fall below the expectations of securities industry analysts or investors. Any such shortfall could result in a significant decline in the market price of our common stock. In addition, the stock market has experienced significant price and volume fluctuations that have affected
the market prices of the stock of many medical device companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may directly influence the market price of our common stock.
We may be required to issue additional shares of common stock at prices that are below then market value.
The holders of warrants to purchase our common stock could require us to issue additional shares of common stock to them pursuant to anti-dilution rights. These rights would cause us to issue additional common stock upon exercise of their warrants if we sell common stock at a price less than the exercise price of their warrants. If we need to sell common stock at a time when the market price for our shares is depressed, these anti-dilution rights could further depress the market price and impair our ability to raise needed capital. As of February 15, 2002 there are 2,396,128 warrants outstanding.
Our international sales expose us to unique risks.
In fiscal 2001, international sales accounted for approximately 5% of our revenue. We believe that international sales will represent a meaningful portion of our revenue in the future. We rely on GEMS-IT and other regional distributors to assist us with our international sales efforts. We are exposed to risks from international sales, which include unexpected changes in regulatory requirements, tariffs and other barriers and restrictions and reduced protection for intellectual property rights. Moreover, fluctuations in the rates of exchange may increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitive products.
Recent terrorist attacks in the United States have affected travel, the stock market, the postal service and the general economy.
On September 11, 2001, terrorists carried out attacks that destroyed the World Trade Center in New York and badly damaged the Pentagon outside Washington, D.C. In the wake of these attacks, stock prices broadly declined from the prices that existed prior to the attacks. In addition to affecting the stock markets, the terrorist attacks may affect the national and international economies because of the uncertainties that exist as to how the United States will respond in the future and as to whether additional attacks will be carried out against the United States. These uncertainties brought about challenges in travel, mail delivery and contributed to a slowdown in economic activity in the United States and beyond. Limitations on travel by our sales and clinical staff could negatively effect our ability to achieve our revenue goals. Additionally, travel closures or delays could negatively impact deliveries of raw materials from our vendor required to manufacture our products including the disposable sensors and deliver them in a timely way to our customers. Delays in the delivery of mail could inhibit our ability to invoice and collect amounts owed to us. The weakened economy may have the effect of and impacting the ability of our management and sales staff to conduct business and, as a result, decreasing our sales.
Recent corporate scandals involving alleged accounting irregularities have resulted in unavailability of, or significantly higher premiums for director and officer liability insurance.
As a result of recent well publicized corporate business failures alleged to have involved improper acts by executives and accounting irregularities, director and officer liability insurance has become more difficult to obtain and the premiums for such insurance have increased significantly. If we are unable to obtain director and officer liability insurance at rates that are reasonable or at all, we may not be able to retain our current officers and directors or attract qualified directors and officers in the future. Common stock that is available for immediate resale may depress our market price.
We have filed registration statements with the Securities and Exchange Commission covering the potential resale by our shareholders of up to 18,700,000 shares of common stock, the majority of which have not been sold. The existence of a substantial number of shares of common stock subject to immediate resale could depress the market price for our common stock and impair our ability to raise needed capital.
A low stock price could result in our being de-listed from the Nasdaq Market and subject us to regulations that could reduce our ability to raise funds.
If our stock price were to drop below $1.00 per share and remain below $1.00 per share for an extended period of time, or if we fail to maintain other Nasdaq criteria, Nasdaq may de-list our common stock from the Nasdaq-Amex National Market. In such an event, our shares could only be traded on over-the-counter bulletin board system. This method of trading could significantly impair our ability to raise new capital.
In the event that our common stock was de-listed from the Nasdaq-Amex National Market due to low stock price, we may become subject to special rules, called penny stock rules, that impose additional sales practice requirements on broker-dealers who sell our common stock. The rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the Securities and Exchange Commission relating to the market for penny stocks. The broker-dealer also must disclose the commissions payable both to the broker-dealer and the registered representative and current quotations for the securities, and monthly statements must be sent disclosing recent price information.
In the event that our common stock becomes characterized as a penny stock, our market liquidity could be severely affected. The regulations relating to penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of purchasers in this offering to sell their common stock in the secondary market.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any cash dividends on our common stock in the foreseeable future. Payment of such cash dividends would, in any event, be prohibited or limited under the terms of our line of credit with Imperial Bank.
