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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-22146
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APPLIED BIOMETRICS, INC.
(Exact name of Registrant as specified in its charter)
State of Incorporation: Minnesota
I.R.S. Employer Identification No.: 41-1508112
Principal Executive Offices: 501 East Highway Thirteen, Suite 108
Burnsville, Minnesota 55337
Telephone Number: (952) 890-1123
---------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
On April 30, 2000, there were 5,881,504 shares of the Registrant's common stock,
par value $.01 per share, outstanding.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
APPLIED BIOMETRICS, INC.
CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
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<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 1,131,969 $ 1,910,356
Inventories, net .................................................... 182,780 167,109
Prepaid expenses and other current assets ........................... 72,755 90,577
------------ ------------
Total current assets ............................................. 1,387,504 2,168,042
Equipment and leasehold improvements, net ........................... 517,988 550,675
Patents and other intangibles, net .................................. 87,972 99,437
Other assets ........................................................ 9,585 9,585
------------ ------------
Total assets ..................................................... $ 2,003,049 $ 2,827,739
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 90,766 $ 95,255
Accrued expenses and short-term debt obligations .................... 162,298 195,849
Current maturities of capital lease obligations ..................... 8,623 8,333
------------ ------------
Total current liabilities ........................................ 261,687 299,437
Non-current liabilities:
Capital lease obligation ............................................ 9,409 11,677
------------ ------------
Total liabilities ................................................ 271,096 311,114
------------ ------------
Shareholders' equity:
Undesignated stock: authorized 5,000,000 shares of $.01 par value;
None issued or outstanding at March 31, 2000 and December 31, 1999 -- --
Common stock: authorized 20,000,000 shares of $.01 par value;
5,356,504 issued and outstanding at March 31, 2000 and
5,229,004 at December 31, 1999 ................................... 53,565 52,990
Additional paid-in capital .......................................... 23,535,901 23,362,233
Accumulated deficit ................................................. (21,857,513) (20,898,598)
------------ ------------
Total shareholders' equity ....................................... 1,731,953 2,516,625
------------ ------------
Total liabilities and shareholders' equity ....................... $ 2,003,049 $ 2,827,739
============ ============
</TABLE>
The accompanying notes are an integral part of the interim unaudited
financial statements.
2
<PAGE>
APPLIED BIOMETRICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
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Three Months Ended
March 31,
2000 1999
----------- -----------
(Unaudited)
Operating expenses:
Selling, general and administrative ...... $ 457,740 $ 177,892
Research and development ................. 521,486 206,284
----------- -----------
Operating loss ........................... (979,226) (384,176)
Other income, net ........................ 20,311 24,243
----------- -----------
Net loss ................................. $ (958,915) $ (359,933)
=========== ===========
Basic and diluted net loss per share ..... $ (0.18) $ (0.08)
=========== ===========
Weighted average common shares outstanding 5,333,949 4,359,262
=========== ===========
The accompanying notes are an integral part of the interim unaudited
financial statements.
3
<PAGE>
APPLIED BIOMETRICS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND
THE YEARS ENDED DECEMBER 31, 1999 AND 1998
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<TABLE>
<CAPTION>
Additional
Common Stock Paid in Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1997 ....................... 4,276,117 $ 42,761 $ 20,278,959 $(15,050,518)
Exercise of stock options ............... 61,000 610 281,890
1998 Net loss ........................... (3,402,138)
------------ ------------ ------------ ------------
December 31, 1998 ....................... 4,337,117 43,371 20,560,849 (18,452,656)
Exercise of stock options ............... 146,887 1,469 1,076,143
Issuance of stock, net of offering costs 815,000 8,150 2,059,412
Distribution of the net assets of
Cardia, Inc. ......................... (334,171)
1999 Net loss ........................... (2,445,942)
------------ ------------ ------------ ------------
December 31, 1999 ....................... 5,299,004 $ 52,990 $ 23,362,233 $(20,898,598)
Exercise of stock options ............... 7,500 75 21,018
Non-employee stock awards ............... 50,000 500 152,650
Net loss for the three-month period ended
March 31, 2000 ....................... (958,915)
------------ ------------ ------------ ------------
March 31, 2000 (unaudited) .............. 5,356,504 $ 53,565 $ 23,535,901 $(21,857,513)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the interim unaudited financial
statements.
4
<PAGE>
APPLIED BIOMETRICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (958,915) $ (359,933)
Net loss from discontinued operations .......................................... -- --
----------- -----------
Loss from continuing operations ................................................ (958,915) (359,933)
Adjustments to reconcile net loss from continuing operations to net cash used by
operating activities:
Depreciation and amortization of capital leases ................................ 57,199 43,611
Amortization of patents and other intangible assets ............................ 20,202 6,239
Value of common stock issued in lieu of cash compensation ...................... 153,150 --
Changes in operating assets and liabilities:
Inventories .................................................................... (15,671) --
Prepaid expenses and other current assets ...................................... 17,822 (30,800)
Accounts payable and accrued expenses .......................................... (38,040) (2,812)
----------- -----------
Net cash used in continuing operations ......................................... (764,253) (343,695)
Net cash used in discontinued operations ....................................... -- (120,548)
----------- -----------
Net cash used in operating activities .......................................... (764,253) (464,243)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of marketable securities .............................................. -- 500,000
Purchase of equipment and improvements ......................................... (24,512) (4,261)
Investments in patents and trademarks .......................................... (8,737) --
Discontinued operations, net ................................................... -- (10,981)
----------- -----------
Net cash provided by (used in) investing activities ............................ (33,249) 484,758
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ........................................ 21,093 25,000
Repayment of capital lease obligations ......................................... (1,978) --
----------- -----------
Net cash provided by financing activities ...................................... 19,115 25,000
----------- -----------
Net increase (decrease) in cash and cash equivalents ........................... (778,387) 45,515
Cash and cash equivalents at beginning of year ................................. 1,910,356 1,869,413
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 1,131,969 $ 1,914,928
=========== ===========
</TABLE>
The accompanying notes are an integral part of the interim unaudited financial
statements.
5
<PAGE>
APPLIED BIOMETRICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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(1) BASIS OF PRESENTATION:
The accompanying unaudited condensed financial statements of Applied Biometrics,
Inc. ("Applied Biometrics" or the "Company") have been prepared by the Company
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
In the opinion of management all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
financial position, results of operations and cash flows of the Company as of
and for the interim periods presented have been included. Operating results and
cash flows for the three months ended March 31, 2000 are not necessarily
indicative of the results of operations and cash flows of the Company that may
be expected for the year ending December 31, 2000.
(2) RECENT EQUITY FINANCING:
During April 2000, the Company completed two private placements of 525,000 units
at an aggregate price of $1,706,250, or $3.25 per unit, resulting in net
proceeds of approximately $1,500,000 after deducting agents' commissions of
$170,625 and other estimated expenses. Each unit consisted of one share of our
common stock and one five-year warrant to purchase one share of common stock at
an exercise price of $3.625. In connection with the private placement the
Company also issued the placement agent five-year warrants to purchase 52,500
shares of Common Stock at an exercise price of $3.25 per share.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-Q INCLUDE "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS
"EXPECT," ANTICIPATE," "PLAN," "MAY," "ESTIMATE" OR OTHER SIMILAR EXPRESSIONS.
SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULT TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED IN OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS INCLUDE THE COMPANY'S DEPENDENCE ON AND NEED FOR
FURTHER DEVELOPMENT OF THE BASIS SYSTEM, ITS SOLE PRODUCT, THE COMPANY'S LIMITED
EXPERIENCE AND FINANCIAL RESOURCES AND UNCERTAINTY OF FUTURE RESULTS, THE NEED
FOR FURTHER DEVELOPMENT ON AND THE UNCERTAINTY OF MARKET ACCEPTANCE OF THE BASIS
SYSTEM, THE COMPANY'S NEED FOR ADDITIONAL FINANCING, THE REGULATED NATURE OF THE
MEDICAL DEVICE MARKET, COMPETITIVE FACTORS AND OTHER RISK FACTORS DISCUSSED IN
EXHIBIT 99.1 TO THIS REPORT AND FROM TIME TO TIME IN THE COMPANY'S OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Applied Biometrics, Inc. ("Applied Biometrics" or the "Company") is a
late-development stage medical device company engaged in the research,
development, manufacture and marketing of advanced cardio-vascular and
hemodynamic diagnostic and monitoring systems. The Company believes that its
core competencies in ultrasound technology, signal processing, cardiac anatomy
and hemodynamics position it to develop and commercialize a range of cardiac
diagnostic and patient monitoring products. The Company's Basis(TM) Cardiac
Output Monitor and RealFlow(TM) Cardiac Output Probe (collectively, the "Basis
System") are designed to provide real-time cardiac output monitoring in surgical
and post-operative, intensive care unit settings.
During the first quarter of 2000, the Company continued its product evaluations
of the Basis System at one adult and one pediatric clinical site in the U.S. To
date, approximately twenty-five cases have been completed. This latest round of
product evaluations constitutes a renewal of the evaluations conducted during
the last quarter of 1999, in which certain further modifications to the Basis
System were indicated. The Company has since completed these modifications, has
resumed the evaluations and is studying the new customer feedback.
To date, the Company has been satisfied with the performance of the Basis System
during these renewed evaluations; management believes that the system has
demonstrated good overall clinical performance and has received positive
feedback from surgeons. The Company intends to conduct approximately twenty-five
additional cases at the two current sites. Pending resolution of any new issues
or needs that may arise, the Company will then expand these evaluations to a
number of additional U.S. clinical sites prior to commercial release. The
Company believes that the surgeon and clinical use feedback from these
additional product evaluations will help identify the Company's marketing,
clinical and distribution strategy.
As part of the Company's quality testing and evaluation activities, the Company
identified a potential mechanical weakness in the RealFlow Probe during the
first quarter of 2000, which will require resolution prior to commercial
release. At the time of this report, the Company anticipates that its probe and
monitor modifications and product evaluations will continue during 2000 with
commercialization of the Basis System taking place in the second half of the
year. These forward-looking statements will be impacted however, by the outcome
of end-user product evaluations, the ability to timely and successfully complete
product development and testing, including the incorporation of necessary
product modifications, commence manufacture of commercial quantities, establish
adequate sales, marketing and customer support activities and obtain additional
financial resources.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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RESULTS OF CONTINUING OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 WITH THE
THREE MONTHS ENDED MARCH 31, 1999
Selling, general and administrative expenses increased $280,000 in the first
quarter, from $178,000 during the 1999 period, to $458,000 during the 2000
period. The Company incurred a non-cash compensation charge of $153,000 during
the current period related to stock granted to the Company's three non-employee
directors for prior and current board service. Non-employee directors of the
Company serve without cash compensation. Also during the 1999 period,
approximately $160,000 of selling, general and administrative costs was
allocated to the Company's discontinued business, Cardia, Inc., which was
spun-off to the Company's shareholders in February 1999. Prior to the spin-off,
these costs were allocated to Cardia as operating expenses of the discontinued
business. After the spin-off, Cardia reimbursed the Company for its prorated
portion of shared operating expenses.
Research and development expenses increased $315,000, from $206,000 in 1999, to
$521,000 in 2000, due to increased costs for engineering, operations and quality
assurance personnel, animal testing, manufacturing pilot costs and product
evaluations. The Company hired a significant number of additional personnel
during the second half of 1999 in order to complete development, begin
manufacturing and conduct market product evaluations on the Basis System. In
addition to increased personnel costs, the Company conducted animal tests and
worked with surgeons at two U.S. clinical sites to obtain product feedback on
the Basis System. The Company has also begun to allocate some resources to the
research and development of new products and next generation products.
Currently, the Company is developing a new cardiac output probe designed for
"beating heart" procedures. This probe, which has been named CO-Flex(TM), is an
off-shoot of its RealFlow Probe and incorporates flexible cabling to facilitate
its use during "off-pump" or "beating heart" cases.
The Company believes that its operating costs will remain at the current level
though the completion of Basis System development and then begin to increase as
the Company adds further personnel and equipment and incurs other costs in
bringing the Basis System to market and increasing its development activities
for new and next generation products. This forward looking statement will be
influenced primarily by the Company's estimate of time and resources needed to
complete development of the Basis System (including the necessary modifications
discussed above), establish sales and customer support systems necessary to
support the product in the field and achieve success in end-user product
evaluations and market acceptance of the Basis System.
Other income, primarily interest income, decreased $4,000 from $24,000 in the
1999 quarter to $12,000 in the 2000 quarter. The decrease is due to lower
average investment balances in the 2000 quarter than in the 1999 quarter. The
2000 first quarter net loss was $959,000, or $0.18 per share, compared to a net
loss of $360,000, or $0.08 per share in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1,132,000 at March 31, 2000 as compared to
$1,910,000 of cash and cash equivalents at December 31, 1999, a decrease of
$778,000. Operating activities during the period used cash of $764,000,
consisting primarily of the net loss for the three-month period offset by
approximately $231,000 of non-cash expenses. Cash was also used in operations by
an increase in inventory and a decrease in accounts payable and accrued
expenses. Investing activities used $33,000 for the purchase of equipment and
legal costs related to the preparation and filing of patent applications.
Financing activities in the three-month period provided $19,000 of cash
primarily from the exercise of employee stock options.
During April 2000, the Company completed two private equity financings resulting
in net proceeds of approximately $1,500,000 million. Based on its expected rate
of spending the Company believes that its existing
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
cash and cash equivalents, including the net proceeds from the April equity
financings, will enable the Company to meet its cash requirements for
approximately the next nine months. The Company believes that is has sufficient
cash to complete development of the Basis System but will need additional
financing in order to successfully meet its market commercialization plans.
These forward-looking statements will be influenced by the Company's ability to
meet its operational and development plans, as well as the impact of any
unanticipated changes to these plans requiring the Company to commit additional
cash. The Company continues to pursue alternatives for obtaining additional
working capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
9
<PAGE>
APPLIED BIOMETRICS, INC.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During April 2000, the Company issued an aggregate of 525,000 units in two
private placement financings, with each unit consisting of one share of the
Company's common stock, $.01 par value, and one five-year warrant to purchase a
share of common stock at an exercise price of $3.625. The units were sold at a
price of $3.25 per unit, resulting in gross proceeds of $1,706,250 and net
proceeds of approximately $1,500,000 after deducting agent's commissions of
$170,625 and other estimated expenses. Miller Johnson & Kuehn, Inc. of
Minneapolis, Minnesota acted as the Company's agent in the private placement.
The units were offered and sold solely to "accredited investors" as defined in
Rule 501(a) and were issued without registration in reliance on Regulation D and
Section 4(2) under the Securities Act of 1933, as amended. In relying upon these
exemptions the Company made certain inquiries and received certain assurances to
establish that the exemptions were available for the issuance. In particular,
the Company confirmed that: (i) the offers of sales and sales were made without
general solicitation; (ii) each investor made representations that he or she was
"accredited," was sophisticated in relation to the investment, and had reviewed
certain information made available by the Company; (iii) each purchaser gave
assurance of investment intent and the certificates for the shares and the
warrants bear an appropriate legend restricting transfer; and (iv) offers and
sales were made to a limited number of persons.
In consideration of its services in connection with the April 2000 private
placements, the Company also issued the agent five-year warrants to purchase an
aggregate of 52,500 shares of its common stock at an exercise price of $3.25 per
share.
In consideration of a $425,000 capital lease commitment by Dexxon Capital
Corporation in April 2000, the Company issued a five-year warrant to Dexxon to
purchase up to 13,500 shares of its common stock at an exercise price of $3.00
per share, with the exact number of shares issuable under the warrant determined
by the Company's aggregate borrowings under the capital lease.
All of the foregoing warrants were also issued without registration in reliance
on Regulation D and Section 4(2), based, among other things, upon the fact that:
(i) the warrants were issued without general solicitation; (ii) each recipient
was determined to be sophisticated in relation to the investment; (iii) each
recipient gave assurance of investment intent and the warrants bear an
appropriate legend restricting transfer; and (iv) offers and sales were made to
a limited number of persons.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
10
<PAGE>
APPLIED BIOMETRICS, INC.
PART II. OTHER INFORMATION - CONTINUED
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits to this quarterly report on Form 10-Q are listed
in the exhibit index beginning on page 15.
(b) Form 8-K. None.
11
<PAGE>
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report signed on its behalf by the undersigned
hereunto duly authorized.
APPLIED BIOMETRICS, INC.
Dated: May 5, 2000
/s/ Camille M. Meyer
----------------------------------------------------
Camille M. Meyer
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
12
<PAGE>
APPLIED BIOMETRICS, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
99.1 Important Factors (incorporated by reference to Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1999).
27.1 Financial Data Schedule for the three-month period ended March 31, 2000
(filed herewith electronically).
13
Exhibit 99.1
IMPORTANT FACTORS
HISTORY OF LOSSES; ANTICIPATED FUTURE LOSSES; ABILITY TO CONTINUE AS A GOING
CONCERN
The Company has experienced continued and significant operating losses since its
inception in 1984 and has an accumulated deficit. The Company anticipates
continuing operating losses for the near future. The Company's ability to
continue as a going concern or to ultimately generate revenues from operations
and achieve profitability depend upon a number of factors, including its ability
to successfully complete development work on and commercialize the Basis(TM)
Cardiac Output Monitoring System and the RealFlow(TM) Cardiac Output Probe
(collectively, the "Basis System") and the costs and related timing of
implementation of its marketing, sales and manufacturing activities. There can
be no assurance that the Company will be able to successfully introduce the
Basis System or that the Company will generate revenues or achieve profitability
at any time in the future.
DEPENDENCE ON AND NEED FOR FURTHER DEVELOPMENT OF THE BASIS SYSTEM
The Company's success depends upon the Basis System, which currently is its sole
product. Although product prototypes were found to perform consistently with the
Company's expectations in Company lab and mammal tests, early results from the
Company's product evaluations of the Basis System and RealFlow Probe indicated
the need for modifications in order to meet the Company's product performance
expectations. While the Company believes that it has made significant progress
completing these modifications and is conducting additional product evaluations,
there can be no assurance that all necessary modifications have been or can be
timely and successfully developed. Any inability to timely and successfully make
necessary product modifications could delay or prevent successful
commercialization of the Basis System, which would have a material, adverse
effect on the Company's business, financial condition and results of operations.
FAILURE OF PRIOR CARDIAC OUTPUT MONITORING SYSTEM
In the Company's early stages - from the years 1984 to 1994 - it developed and
marketed two ultrasound-based cardiac output devices: one that was integrated
into an endotrachial tube, and the other being a predecessor to the current
Basis System. Both products were sold or distributed in the 1990's in small
quantities. After a small commercialization effort, the Company ceased marketing
due to unreliable product performance caused by a variety of factors, including
inadequate probe sensitivity and signal processing, and hardware performance
constraints. Although management believes that the Basis System incorporates
design changes that address the shortcomings of the prior systems, there can be
no assurance that performance problems will not occur in clinical use of the
Basis System.
NEED FOR ADDITIONAL FINANCING
The Company expects that additional financing will be needed to fund its product
commercialization plans. If the Company's operational plans do not progress as
anticipated, the Company's ability to attract additional financing could be
impaired. No assurance can be given that the Company will be able to obtain any
additional financing on acceptable terms or at all, and failure to do so would
have a material, adverse effect on the Company's business, financial condition
and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE
The commercial success of the Company's Basis System will require acceptance by
cardiac surgeons and other medical specialists. Such acceptance will depend, in
part, upon clinical validation results and the conclusion by these medical
professionals that the Basis System is accurate, reliable and effective and that
that Basis System offers enhanced functionality relative to current cardiac
output monitoring technologies. There can be no assurance that the Basis System
will provide clinical benefits considered superior by these professionals or
that a sufficient number of such professionals will use the Basis System for
commercial success to be achieved. Because the Basis System represents a
different method of clinical assessment and an improved product compared to the
Company's earlier development efforts that failed to achieve commercial success,
there may be greater reluctance to accept this product than would occur with
products using well-established technologies. Substantial efforts may need to be
devoted to
1
<PAGE>
educating the market to the Company's technologically different approach and the
improvements in the Basis System over the Company's prior cardiac output
monitoring systems. Failure of the Company's product to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF MANUFACTURING EXPERIENCE
The Company's current plans call for it to manufacture the Basis System
internally. The Company has only limited manufacturing experience and could
encounter difficulties in scaling up production. These problems may include
estimating optimal product volume and mix requirements, production yields,
controlling and anticipating product costs, quality control and assurance,
component supply and contending with shortages of qualified personnel. There can
be no assurance that manufacturing difficulties will not occur. Such
difficulties could have a material adverse effect on the Company.
LACK OF MARKETING EXPERIENCE
The Company has no experience in marketing the Basis System and has no current
sales capabilities. There can be no assurance that the Company's marketing
efforts will result in commercial sales or that the Company will be able to
develop an effective sales force and distribution network without incurring
substantial delays or costs or at all. Failure to develop an effective direct
sales organization or an effective distribution network would have a material
adverse effect on the Company.
COMPETITION
Competition in the medical device industry in general and in the market for
cardiac output monitoring in particular is intense. Edwards Lifesciences
Corporation (formerly a division of Baxter Healthcare Corporation), Johnson and
Johnson and Abbott Critical Care currently dominate the cardiac output
monitoring market. These companies make and sell catheters, thermodilution
cardiac monitors and peripheral products used to measure cardiac output by the
widely used thermodilution method. While the Company believes its Basis System
represents significant improvements over existing products in the marketplace,
the Company must be able to effectively demonstrate the beneficial features of
the Basis System and must maintain competitive pricing in order to successfully
sell its products. Competition in the Company's market may result in pricing
pressures that may adversely affect product gross margins. The Company competes
with the companies listed above and other large companies, many of which have
greater resources and established operations. These competitors also have
greater depth in research and development, manufacturing and marketing and sales
capabilities. The ability of the Company to compete effectively will depend upon
the advantages and proprietary nature of the Basis System, on the Company's
ability to attain and maintain technological leadership and to generate sales.
There can be no assurance that the Company will be able to successfully compete
against its current or future competitors.
LIMITED HUMAN USE OF THE BASIS CARDIAC OUTPUT MONITORING SYSTEM
To date, the Company has completed extensive research, conducted lab and animal
testing and conducted limited human clinical use of the Basis System. Although
the Company believes that its research and testing provide support for the Basis
System's performance in humans, there can be no assurance that research and
animal testing alone will identify all the technical issues or potential
problems with use of the Basis System in humans in generally, or in any subset
of humans having differing anatomical structures or disease characteristics. The
Company is and plans to continue a series of product evaluations of the Basis
System at a number of clinical sites in the U.S. prior to commercial launch of
the system. There can be no assurance that acceptable results will be obtained
in these human evaluations or that modifications will not be needed. If
modifications are needed, there can be no assurance that they can be timely and
successfully developed. Any failure of the Basis System to achieve acceptable
results in these humans evaluations or of the Company to timely and successfully
develop necessary modifications could lead to delays in the introduction and
market acceptance of the Basis System. A delay in market introduction of the
Basis System would have a material adverse effect on the Company's business,
financial condition and results of operations.
2
<PAGE>
TECHNOLOGICAL OBSOLESCENCE; DEVELOPMENT OF NEW PRODUCTS
Rapid technological advances characterize the medical device market. Even if the
Basis System is successfully developed and accepted, it may be rendered obsolete
by technological developments, new innovations or changes in the medical
marketplace. The Company's success will depend in part on its ability to respond
quickly to medical and technological changes and to develop and introduce new,
cost-effective versions of its Basis System in response to competitive
innovations. Development and commercialization of new products will require
additional research and development expenditures and may require new regulatory
approvals. There can be no assurance that the Company will successfully identify
new market opportunities and develop new products or that these new products
will receive necessary regulatory approvals or be successfully received by the
marketplace or, if so, that the Company's products will not be rendered obsolete
by changes in technology.
LIMITATIONS ON THIRD PARTY REIMBURSEMENT
The Basis System will generally be purchased by hospitals which then seek
reimbursement from various public and private third party payers covering
cardiac surgery patients, such as Medicare, Medicaid and private insurers, for
the health care services provided to patients. There can be no assurance that
these third party payers will consider use of the Basis System cost-effective.
If the Basis System is not considered cost-effective and not approved for
reimbursement, this will materially adversely affect the prospects of the Basis
System and the Company itself. Even if the third party payers approve the Basis
System for reimbursement, there can be no assurance that the level of
reimbursement approved will be high enough to make the Company a profit from
selling the Basis System. Furthermore, the amount of reimbursement for treatment
for various cardiac diseases could decrease in the future and reduce the amount
paid for the Basis System. Failure by hospitals and other users of the Company's
products to obtain sufficient reimbursement for use of the Basis System in
cardiac output monitoring could have a material adverse effect on the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain and maintain
patent protection for its products, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. The Company has U.S.
and foreign patents and patents pending, which relate to devices and methods
used to measure blood flow through a major mammalian artery using ultrasound
technology, the release mechanism employed by the RealFlow probe, and certain
methods and techniques which relate to minimally invasive surgery, beating heart
surgery and advanced signal processing. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurances can be given
that any current patents will be maintained, that patents under pending
applications or any future patent applications will be issued, that the scope of
any patent protection will exclude competitors or provide competitive advantages
to the Company, that any of the Company's patents will be held valid if
subsequently challenged, that others will not claim rights in or ownership of
the patents and other proprietary rights held by the Company or that the Basis
System or other products and processes will not infringe, or be alleged to
infringe, the proprietary rights of others.
If the Company is found to have infringed on the rights of a third party, the
Company may be unable to market its products without a license from such third
party. There can be no assurance that the Company would be able to obtain such a
license on satisfactory terms, or at all. Furthermore, there can be no assurance
that others have not developed or will not develop similar products or
manufacturing processes, duplicate any of the Company's products or
manufacturing processes, or design around the Company's patents. In addition,
whether or not additional patents are issued to the Company, others may hold or
receive patents that contain claims having a scope that covers products
subsequently developed by the Company.
The Company also relies on unpatented trade secrets to protect its proprietary
technology, and no assurance can be given that others will not independently
develop or otherwise acquire substantially equivalent technologies or otherwise
gain access to the Company's proprietary technology or disclose such technology
or that the Company can ultimately protect meaningful rights to such unpatented
proprietary technology.
There has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of effort by the Company, may be
3
<PAGE>
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, to defend the Company against claimed
infringement of the rights of others or to determine the ownership, scope or
validity of the proprietary rights of the Company and others. An adverse
determination in such litigation could subject the Company to significant
liabilities to third parties, require the Company to seek licenses from third
parties and prevent the Company from manufacturing, selling or using its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENTAL REGULATION
As a medical device company, the Company is subject to extensive and rigorous
regulation by the FDA in the United States and by comparable agencies in foreign
countries. The FDA regulates the introduction of medical devices as well as
manufacturing, labeling, distribution, sale, marketing, advertising, promotion
and record keeping procedures for such products.
Although the 510(k) marketing clearance received from the FDA in 1991 for the
Company's trans-aortic system was confirmed in 1996 and then again in May of
1999, using both internal and external consulting evaluations and is believed to
be valid for the Basis System, such clearance can be withdrawn temporarily or
permanently by the FDA due to failure to comply with regulatory standards or the
occurrence of unforeseen problems with the Basis System. The FDA also has the
power to limit or prevent the manufacture or distribution of the Basis System
and could require its recall. FDA regulations depend heavily on administrative
interpretation, and there can be no assurance that future interpretation made by
the FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company. The FDA and various agencies inspect the Company
and its facilities from time to time to determine whether the Company is in
compliance with regulations relating to medical device manufacturing, including
regulations concerning manufacturing, testing, quality control and product
labeling practices. A determination that the Company is in material violation of
such regulations could lead to the imposition of civil penalties, including
fines, product recalls, product seizures, or, in extreme cases, criminal
sanctions. In addition, there can be no assurance that the government
regulations will not change, and thereby prevent the Company from temporarily or
permanently marketing the Basis System. The withdrawal by the FDA of its
marketing approval for the Basis System, the recall of the Basis System or
similar regulatory action would have a material adverse effect on the Company's
business, financial condition and results of operations.
As part of its strategy, the Company expects to pursue commercialization of its
products in international markets, and therefore, the Company's products will be
subject to regulations that vary from country to country. The process of
obtaining foreign regulatory approvals in certain countries can be lengthy and
require the expenditure of substantial resources. There can be no assurance that
the Company will be able to obtain necessary regulatory approvals or clearances
on a timely basis or at all, and delays in receipt of or failure to receive such
approvals or clearances, or failure to comply with existing or future regulatory
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY OF HEALTH CARE REFORM
The levels of revenue and profitability of medical device companies may be
affected by the continuing efforts of government and third party payers to
contain or reduce the costs of health care through various means. In the United
States there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to control health care costs. These
proposals contain measures intended to control public and private spending on
health care as well as to provide universal public access to the health care
system. If enacted, such proposals may result in a substantial restructuring of
the health care delivery system. Significant changes in the nation's health care
system are likely to have a substantial impact on the manner in which the
Company conducts its business and could have a material adverse effect on the
Company's business, financial condition and results of operations. Similarly,
the marketing and sale of the Company's products in foreign countries could be
materially adversely affected by health care reform in such countries.
4
<PAGE>
NEED TO EXPAND; DEPENDENCE ON KEY PERSONNEL
The Company needs to expand its management, research and development,
manufacturing and sales and marketing personnel in order to support development
and commercialization of the Basis System. The inability to hire personnel as
needed may have a material adverse effect on the Company. The success of the
Company will depend in part upon its ability to attract and retain capable
technical staff as well as sales and marketing personnel in the future. The
Company is currently dependent on the services of Andrew M. Weiss, the Company's
President and Chief Executive Officer. The loss of Mr. Weiss could have a
material adverse effect on the Company.
RISKS RELATED TO INTERNATIONAL SALES
The Company's plan to distribute the Basis System in international markets
involves certain risks, including the impact of any tariffs, quotas and taxes
which may be imposed by foreign governments on international sales of the Basis
System, the impact of potential political and economic instability on demand for
the Basis System, restrictions on import or export of technology which could
prohibit or restrict international sales, and potentially limited intellectual
property protection which could cause the Company to refrain from selling in
certain international markets. Currency fluctuations could also cause the Basis
System to become less affordable or less price competitive in international
markets. Any of these factors would adversely impact the Company's ability to
sell the Basis System internationally, and could in turn have a material,
adverse impact on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY SUPPLIERS
There are multiple sources for most of the components used in the Basis System.
Several components, however, are currently available from only a limited number
of vendors or are nearing the end of their product life cycle and availability.
The inability to obtain such components on a timely basis or to identify,
validate and procure alternative components would have an adverse impact on the
Company's ability to fill orders from customers.
PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The medical device industry is subject to substantial litigation, and the
Company faces an inherent business risk of exposure to product liability claims
in the event that the use of the Basis System is alleged to have resulted in
adverse effects to a patient. Although the Company maintains product liability
insurance, there can be no assurance that the coverage limits of its insurance
policies will be adequate, or that such insurance will be available in the
future on acceptable terms, if at all. A product liability claim or other claim
with respect to uninsured liabilities or in excess of insured liabilities could
have a material adverse effect on the business, financial conditions and results
of operations of the Company.
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION FROM FINANCIAL STATEMENTS AND
RELATED NOTES FOR THE PERIOD ENDED MARCH 31, 2000.
</LEGEND>
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<CURRENT-LIABILITIES> 261,687
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<COMMON> 53,565
<OTHER-SE> 1,678,388
<TOTAL-LIABILITY-AND-EQUITY> 2,003,049
<SALES> 0
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