Hearing Testing Systems Business Plan

The majority of hearing-impaired individuals who use hearing-aids or undergo surgery to receive cochlear implants expect to hear well. However, the reality is that tens of thousand of patients continue to experience severe difficulty hearing in the real world, away from the clinical setting. This is primarily due to the incorrect adjustment of the settings on the medical device by a clinician. Consequently, audiologists and speech therapists greatly need a hearing test that can quickly and accurately predict how well individuals, with either a cochlear implant or a hearing aid, can hear in a noisy “real world” environment following installation of the medical device. Such a test is especially important for children, as early intervention can reduce slowed learning. It is estimated that if children with hearing loss do not receive early intervention, special education for a child with hearing loss will cost an additional $420,000 in special education costs and result in a lifetime cost of approximately $1 million per child.^[1] In adults, hearing loss can begin as early as age 50 and lack of early intervention can lead to loss of jobs, emotional distress and even cognitive disorders. In addition, since life expectancy can realistically reach to age 90 and beyond, an individual could potentially be affected by hearing loss for half of his/her lifetime.

Pure tone hearing tests, which require audiometers and sound proof booths to deliver the tone, are currently used to evaluate hearing loss. These tests evaluate fundamental hearing loss, but cannot predict how well an individual will understand words and sentences in a realistic environment. Current tests also cannot asses whether or not a second cochlear implant or second hearing aid would significantly improve the hearing of a patient. This is important to patients and their families as cochlear implants and hearing aids cost approximately $40,000 and $5,000, respectively, and often are not covered by insurance companies.

Auris Solutions is an early stage hearing care company, which solves these market needs by delivering novel and scalable software-based hearing tests that rapidly and reliably assess hearing in a realistic environment. Unlike other tests, our tests enable the clinician to both optimize the hearing device settings, and make recommendations regarding the purchase of additional hearing devices for their patients. Setting the medical device optimally for each patient can make an enormous difference, in saving them from the emotional and mental problems associated with hearing ineffectively. We believe that our tests will become a mandatory part of an audiology clinic’s portfolio of hearing tests, performed following the audiogram tone test.

Auris Solutions is ready to market its first product: CRISP (Children’s Realistic Intelligibility and Speech Perception). This rapid and reliable system for clinically testing speech intelligibility of children computerizes the method used to analyze hearing test results, so as to enable a clinical user to more accurately control the presentation of sounds, the storage and analysis of results, and the process by which the child may interactively make choices and receive reinforcement during the test.

Auris Solutions is currently seeking $250,000 to implement our marketing strategy as well as to offset our start-up costs, which include product development, capital equipment purchases and to support the business development plan for current and future products.

_________________________

[1] http://trfn.clpgh.org/shhh/Factsheet.html#r1

1.1 Objectives

• We will implement a business model that will allow us to achieve and maintain a gross margin equal to or above 75%.
• We will recruit a management team that has relevant knowledge and experience in order to promote and enhance the company’s core competencies.
• We will satisfy our customers by offering products free of defects and by offering outstanding customer service that will consistently exceed customers’ expectations.
• We will invest a significant portion of our sales revenues into research and development in order to grow and offer new, innovative products within the hearing care market.

1.2 Mission

Auris Solutions, LLC is a comprehensive and innovative solutions provider for refining hearing loss diagnoses.  We pride ourselves on the fact that our products are more rapid, reliable, and efficient than competitors.  Our business will be managed to achieve planned growth and long term profitability.  We will grow by building upon demonstrated strengths and meeting our customers’ needs.  As a result, Auris Solutions, LLC will optimize shareholder value and be respected worldwide as a solutions provider company in the hearing industry.

We stand by the following values:

• Corporate Responsibility – The Company will participate in community events.
• Ethical Standards -The Company will conduct business based on sound ethical principles.
• Compassion – We reach out with openness, kindness, and concern.
• Respect – We honor the wonder of the human spirit.
• Excellence – We expect the best of ourselves and one another.
• Stewardship – We use our resources responsibly.
• Community – We cultivate relationships that inspire us to serve.

1.3 Keys to Success

At Auris Solutions, we aim to provide our customers with the best products and related services. Our commitment to quality will begin with our employees, who are our most important assets.  Thus, our employees will be accountable in each of the following areas, which are key to our success:

• Management Team:
• Hire the right people to work for the company
• Set evaluation policies and standards for all employees
• Delegate and make staff accountable for their work
• Sales & Marketing:
• Establish awareness of Auris brand and product offerings
• Set and implement a sales strategy
• Manage barriers to entry 
• Implement a marketing plan that successfully brings our advertisements and products to the target market
• Provide customer support for all products after purchase
• Product Development and Product Quality: 
• Launch new products on time
• Establish quality processes
• Management & Customer Service:
• Manage purchasing properly
• All purchases should be based on customers’ needs 
• Reduce need for an in-house inventory and overhead costs
• Set marketing budgets and manage accounts receivable
• Set a program to manage customer satisfaction:
• Products shipped and delivered on time 
• Effectively respond to customer complaints

Auris Solutions is an early-stage company that is currently using its proprietary technology (US patent #6,584,440) and well-regarded scientific knowledge to create systems solutions for the hearing care industry. Auris aims to capitalize on the hearing care industry by providing products that will enable hearing care professionals to quickly and accurately test hearing loss and to assess the benefits of cochlear implants and hearing aids for both children and adults. In addition, the company’s upcoming products will evaluate sensory/cognitive deficits in children and adults with developmental disabilities and mental retardation.

Audiologists and speech therapists greatly need a hearing test that can quickly and accurately assess how well an individual, with either a cochlear implant or a hearing aid, can hear and understand words in a noisy or realistic environment. Such a test is especially important for children, as early intervention can reduce slowed learning in a classroom setting, which may have lifetime costs to society of up to $1M per child. Additionally, for adults, lack of early intervention can lead to loss of jobs, emotional distress and even cognitive disorders. This is important since hearing loss can begin as early as age 50. And, since life expectancy can nowadays realistically reach to age 90 and beyond, an individual could potentially be affected by hearing loss for half his/her entire life.

Current systems like audiograms are used to evaluate hearing loss, but cannot assess how well individuals understand speech in a relatively “noisy” environment such as a classroom setting or office. Thus, in order to solve this problem, Auris Solutions has developed a proprietary (US patent #6,584,440) hearing test called the Children’s Realistic Intelligibility and Speech Perception (CRISP) test. The CRISP test does not require FDA approval, has already been beta-tested and is immediately ready for market. Although the CRISP test was primarily developed to test children’s hearing capabilities, Auris Solutions also has several other products in the pipeline, one of which will be ready for launch in 3 months, which will create a diversified portfolio of software testing solutions for the hearing care industry. (See 3.5, Future Products, below for more information.)

2.1 Start-up Summary

Auris Solutions’ start-up costs are associated with the related legal services to structure the operating agreement with each stakeholder, the final software development costs, the sales and marketing expenses, and the licensing cost. The following table is a summary of the start-up costs that Auris Solutions will incur once the funding is secured. Included in Start-up expenses is exclusive licensing of the patented software from the Wisconsin Alumni Research Foundation (WARF).

2.2 Company Ownership

Auris Solutions plans to be a privately-held, Limited Liability Corporation, with Dr. Plauger as one of the owners and the key driver of research and new product development. However, we believe that in order to attract talented management, we will need to create a stock option pool not higher than 45% of the total shares. See the table below for an ownership breakdown.

2.3 Company Locations and Facilities

Auris Solutions is temporarily located in the Big Building in Madison, Wisconsin. The present office space is small. As revenues grow, we will have to look for additional space in order to accommodate employees. Our current facility could serve for shipping purposes.

To summarize, the CRISP test is:

• A method and system for clinically evaluating speech intelligibility in children in such a way as to link the child’s normal environmental noise experience to the audiology clinic.
• A rapid and reliable method and system for testing the speech intelligibility of a child, that is adapted to engage children so as to enable a tester to determine what auditory factors are contributing to the child’s speech intelligibility level.
• A method and system for simulating a child’s normal classroom environment by providing a variety of types of competing noises so as to determine their effect(s) on the speech intelligibility of the child.
• A method and system for testing the effects of location of competing noises relative to a target word source and the child so as to determine the spatial release from masking potential of said location.
• A system for computerizing the method so as to enable a clinical user to more accurately control the presentation of sounds, the storage and analysis of results, and by which the child may interactively make choices and receive reinforcement.

The CRISP test will allow audiologists to offer better service, which will become an additional source of revenue for their clinics. For example, depending on the complexity of the tests, audiologists typically charge anywhere from $35 to $200 per test for the new service. The beta version of CRISP is currently being sold and used by both independent audiologists/speech therapists and researchers as part of a clinical trials study for cochlear implants. These individuals are also providing additional feedback on the functionality and ease of use of the software. The audiologists who run the clinics and are beta-testing CRISP are considered to be significant influences within the field of audiology. Key beta-test audiologists include:

Jane R. Madell, Ph.D.
Director: Hearing and Learning Center
Beth Israel Medical Center
[Proprietary and confidential information removed.]

Patricia Chute, Ph.D.
Mercy College
[Proprietary and confidential information removed.]

Richard Tyler, PhD.
University of Iowa
[Proprietary and confidential information removed.]

In addition to these key beta-test sites, the CRISP test is also being beta-tested in many other clinics across the United States, including Texas (four different clinics), California (three different clinics), Alabama, New Mexico, Wisconsin, and Michigan.  The valuable feedback from these beta-test sites will be incorporated into Version 3.0 of the CRISP test.

Testimonials
Auris Solutions has received feedback regarding the CRISP test from many of its beta-test sites. The feedback Auris has received has been overwhelmingly positive. For instance, Dr. Richard Tyler says, “[CRISP] is a well-designed, easy to use, and clever test that provides lots of information and has the potential to attract lots of users.”  In addition, Dr. Jane Madell says, “there is no other test like it available on the market today.”  Finally, Dr. Patricia Chute says, “CRISP is very easy-to-use, and scores more rigorously than any other test available on the market.”

The feedback we have received confirms our beliefs that the CRISP test solves a real problem in the clinics of audiologists and speech therapists.

3.1 Product Description

The CRISP test comprises target sounds as words that occur in the presence of competing sound(s), that are either spatially near or separated from the target. CRISP will enable the user to measure a child’s ability to understand speech in the presence of competing noise or words, and the extent to which each individual child benefits from spatial separation of the target and competing sounds. In CRISP, the child is required to respond to the target word by selecting a picture representation of the target word from among several picture choices, thus providing an interactive aspect to the test. Animations and feedback will be employed to engage the child during the test as well as functioning as a form of positive reinforcement. CRISP provides a set of rules whereby the sound level at which target words are presented may vary adaptively according to the child’s responses. The test repeats several target words under a variety of types and locations of competing sounds and records the child’s responses in a results database. The results are available for further analysis by a user to produce a customized output. A computerized system enables provisioning the test in a controlled manner, analysis of the data, and further engagement of the child.

As shown above, the set-up requires an amplifier, a sound level meter, a minimum of two speakers (distanced 3 ft minimum from the patient), and a computer system with at least Windows 98 to perform the CRISP software test. Testing should take place in a professional soundproof audiology booth, which does not present a problem, as the booth is already a standard component of all audiology clinics. The price range for the software is $2,000 to $2,500.

3.2 Competitive Comparison

The Industry Analysis (section 4.3, below) contains a discussion of some hearing tests that attempt to mimic a realistic environment. These tests, however, are primarily designed for adults. A summary of how the CRISP hearing test differs from other currently available tests is detailed in the table below:

3.3 Strengths and Challenges

Barriers to Entry Against Competition
Auris Solutions’ CRISP hearing test system is protected under United States patent #6,584,440: Method and System for Rapid and Reliable Testing of Speech Intelligibility in Children. The patent was granted on June 24, 2003. The invention was disclosed to the Wisconsin Alumni Research Foundation of the University of Wisconsin at Madison (WARF); The Company is currently negotiating the terms of an exclusive licensing agreement with WARF. In addition, CRISP, as well as any name for each future system, are secured under trademarks. We believe that the patent as well as the trademark will provide significant barriers to entry with respect to competitors copying the CRISP hearing system and method.

Auris Solutions’ Challenges
There are two main challenges Auris Solutions needs to address when formulating its marketing strategy:

Establish brand equity – Because the CRISP hearing test is a new product that will be introduced from a new company, the test and company will have no brand equity established in the marketplace. Consequently, it will be important to establish a brand name as soon as possible through different marketing efforts. This weakness will be mitigated through advertising in an effort to increase awareness. However, within the hearing care industry, credentials are key, as stated above. Therefore, with CRISP, brand equity problems will also be mitigated through Dr. Plauger’s own credibility and status within the hearing healthcare industry.

Overcome reasons not to buy the test – Many audiologists and speech therapists use audiometers for hearing tests and stop there. The problem with this is that the healthcare professional will not know how well the patient will hear in a realistic environment following surgical implantation of a cochlear implant or fitting of a hearing aid. Therefore, it will be important to demonstrate to these audiologists how the CRISP hearing test can offer additional functional benefits to complement the use of the audiometer. In addition, it will also be important to make the healthcare provider aware that administering the CRISP hearing test will be a revenue generator. This will be mitigated through our integrated marketing communications plan.

In addition, within the hearing care industry, credentials are key; researchers, such as Dr. Plauger, who have deep industry experience and knowledge, are very well respected. This has enabled them to develop an extensive network of contacts within the industry. Therefore, products that such researchers develop have more credibility due to the researcher’s own brand equity, in terms of the underlying basis of trust and respect that has already been painstakingly established over many years. Therefore, with Auris’ current and future systems solutions, a key barrier to entry is through Dr. Plauger’s own credibility and status within the hearing healthcare industry and the significant learning curve advantage of developing such a comprehensive test.

3.4 Sales Literature

Once funding has been secured, we will spend not more than a month in developing a comprehensive company brochure, software demos, and a CD case for our first product. The brochure will describe our company, as well as its product offerings, along with some other product information for the same target customers. We will also incorporate the same brochure into our web page.

3.5 Technology

Auris Solutions’ CRISP hearing test system is protected under United States patent #6,584,440. As a brief description of the technology, CRISP hearing test is a method and system for testing the speech intelligibility of a child comprises providing a set of target sounds as words in the presence and absence of competing sound(s) of a variety of types so as to enable an analysis of the aspects of competing sounds and their respective effects on the speech intelligibility of a child. CRISP varies the locations at which competing sound(s) is provided, to enable an evaluation of the sounds’ effects on the spatial release from masking.

The target words used in the test are first determined to be within the vocabulary of the child. The child is required to respond to the target word by selecting a picture representation of the target word from among several picture choices, thus providing an interactive aspect to the test. Optionally, a positive or negative reinforcement may be provided. The sound level at which the target words are presented may vary adaptively according to the child’s responses, the change in sound level being determined by a set of rules. The test is repeated over several target words and under a variety of types and locations of competing sounds, and the child’s responses are recorded in a results database. Users may further analyze the results to produce customized output. The computerized system enables administering the test in a controlled manner, analyzing the data, and further engaging the child.

3.6 Future Products

In addition to CRISP, Auris Solutions also has several other products in the pipeline that will create a diversified portfolio of software testing solutions for the hearing care industry.  The new products are listed below, with current timelines.

Products Ready to be launched by 2005:

• Minimum Audible Angle (MAA): This test measures the smallest change in the position of a sound that can be reliably discriminated.  Typically, normal hearing adults can discriminate differences of 1-2º, and children ages 5-6 perform similarly. However, hearing-impaired people perform much worse, especially if they do not have binaural hearing.  The MAA test can be used to assess the benefits of having two cochlear implants, two hearing aids, or one of each, for both children and adults.  This product will be ready for launch in 2005, and targeted to the same customer segments as the CRISP test.  An owner’s manual has been completed for this product. A price range has been established between $800 and $1,000. 

Products in the Pipeline: 

• CRISP Junior: A variation of CRISP for children of ages ranging from 2 to 3 years old.
• Sentence Materials:  A variation of CRISP where the child would repeat the sentence that s/he heard rather than responding to pictures in the screen. 
• Echo Suppression: The ability of the auditory system to process sounds in the real world depends on how well people can ignore echoes, which are abundant in every room.  The task is similar to the MAA test (above) except that a simulated echo is also presented from one loudspeaker in the center.  Young children are worse than adults at suppressing echoes, due to their immature hearing.  This test provides a very useful assessment tool for the maturation of the binaural hearing system, and can be used in children and adults.
• ERISP Test (Elder’s Realistic Intelligibility and Speech Perception):  A variation of CRISP for the implementation of hearing tests that are easily used by the elderly population.  The test assists in determining the degree of hearing loss, ability to hear in noisy environments, and benefit of a hearing aid or cochlear implant for individual patients.
• Children with developmental disabilities (DD) and mental retardation (MR): Other measures of hearing are being developed that will help to assess sensory and cognitive deficits in children and adults with DD and MR. These tests would provide (1) tools for further evaluating and differentiating between affected individuals and (2) insight into development of appropriate tools for rehabilitation and training.

The US hearing care industry is composed of more than 105,000 practitioners (94,000 speech pathologists, comprehensive and 11,000 audiologists) providing hearing care products and services. This market class includes specialists that offer services to hearing impaired patients. These services include several segments:

• Hearing rehabilitation, including the evaluation and rehabilitation of hearing-impaired individuals.
• Advanced audio-diagnostic services, including the neuro-audiological evaluation and non-medical diagnosis of hearing and balance disorders.
• Industrial and preventive audiological services, including noise level measurements, dosimetry, and hearing screenings.

The CRISP test is expected to be offered to patients by all 3 service segments.

Typical Hearing Test Process

Typically, an individual undergoes the following process for hearing testing:

1. The patient or family makes an appointment with an audiologist or speech therapist at the hospital or independent audiology clinic.
2. The patient is tested for hearing using a tone test delivered through an audiometer. The patient will raise their right or left hand signaling to the clinician that the subject hears the tone in that particular ear; in some cases an electronic method is used where the patient will simply push a button when hearing the tone.
3. Based on the collected result, the clinician makes a clinical assessment of the individual’s ability to hear. If the individual is defined to have hearing loss, then the audiologist will administer a tympanogram in order to test the mobility of patient’s eardrum. The audiologist will also deliver a brainstem auditory evoked response to evaluate the health of the cochlea.
4. The clinician then makes a recommendation as to whether or not the patient needs a hearing aid or cochlear implant.
5. After installation, the settings on the hearing aid or cochlear implant are adjusted based on trial and error.

Where Does the CRISP Test Fit into the Hearing Test Process?

After installing and adjusting the settings on the medical device, the clinician has no way to know if the specific settings will actually be ideal for the patient to hear in the real world. The CRISP test will allow the clinician to make specific adjustments to the hearing aid or cochlear implant that best optimizes the patient’s ability to hear. In this capacity, the CRISP test will fit in just after step 5 of the above process; clinicians will be able to charge for this service.

In addition to testing hearing in patients who have no hearing devices, many patients seek hearing care professionals to determine if another hearing aid or cochlear implant on the other ear would benefit them. Currently, clinicians have no test that will assess the benefit of adding another hearing device to the patient’s regimen. Therefore, in this capacity, the CRISP test would fall into steps 2 and 3. The CRISP would allow the clinician to definitively make a recommendation to the patient regarding the addition of another medical hearing device. Clinicians can also charge for this service.

4.1 Market Segmentation

Auris Solutions will focus its marketing efforts towards the 105,000 audiologists and speech pathologists who work in the organizations described below.

Customer Segments ^[1]

_____________________________

[1] 2000 U.S. Census

[2] D&B Million Dollar Database (search of SIC 8099), 2003.

4.2 Industry Analysis

Auris Solutions’ product offerings fall under the healthcare industry category, with a Standard Industry code (SIC) 8099, and secondarily as part of the electromedical equipment industry, with SIC 3845. Even during economic downturns, these markets have remained sheltered from decreased spending.^[1] Worldwide market growth for medical equipment and products is estimated to be 12% as of 2003. U.S. companies are benefiting from sales of new technology products, which are currently commanding a significant price premium. We feel that Auris Solutions’ product offerings will benefit from these trends, as CRISP is a highly technical product, and it appears that the market will support a price premium.

_____________________________

[1] Standard & Poor’s Industry Review, 2003.

4.2.1 Industry Participants

Companies in the hearing-care-testing industry generated approximately $200M of sales in 2003,^[1] and the market is expected to grow in the range of 21% to 35% annually. Based on our research, there are only 3 dominant players in this industry; collectively, they possess 52% of the market share:

• HearUSA (29.5%)
• Bio-Logic (13%)
• National Hearing Centers (9%)

None of Auris Solutions’ products will compete directly against the current hearing test techniques, products or services offered by the above companies. Thus the Company is an attractive potential strategic partner or acquisition target for the above listed companies.

_________________________

[1] D&B Million Dollar Database (search of SIC 8099 limited to hearing care products)

4.2.2 Competition and Buying Patterns

Direct competitors of the Company include companies that offer software-based hearing tests instead.  We performed a thorough search using proprietary market research software and found only a few companies that would compete directly against CRISP, although no companies offer products comparable to the CRISP test. The results of our search are shown in the table below.

Competition Analysis

A typical private audiologist or hearing care professional sees approximately 10-12 patients per day. These professionals purchase related hearing products based on reliability and the perceived benefits for their patients. Based on our research, hearing care clinicians are relatively price insensitive because they want to offer the best possible care for their patients. In addition, our preliminary research revealed that hearing care professionals often purchase from $500 up to $20,000 in related software/systems for conducting related hearing loss tests. In addition, these individuals frequently become aware of new products from the following mediums:

• Direct Mail Advertising
• Journal Publications
• Web searches and company websites
• Conferences & Trade Shows
• Direct Sales

4.3 Target Market Segment Strategy

We plan to engage these potential customers principally through referrals, trade shows, publications and direct advertising as well as through a small regional sales force. The Independent Speech Therapists and Audiologists segment, as well as birthing hospitals (non-HMO), are most likely to buy our products based on their superior functional benefits and potential for new revenue generation by charging end-users for per test runs. Additionally, some audiologists and speech therapists will be motivated to buy CRISP based on the intangible benefits of feeling confident about their audiology clinic’s services, if they are offering the most comprehensive and innovative tests available to market.

In preparation for our marketing efforts, we have created a full contact list for all of our targeted customers. In addition, although we will initially focus on customers in the U.S., we will consider an opportunity to grow abroad upon international patent approval.^[1] Indeed, just recently, MED-EL,^[2] an Austrian cochlear implant manufacturer, approached Auris to build an alliance with Auris in order to create the German version of CRISP. Another company in South Africa has requested to become a beta test site, and an Afrikaans version of CRISP is currently in development.

_______________________________________________

[1] Auris Solutions has applied for patent approval in Europe and Asia.

[2] http://www.comprehensive.com/ENG/us/us_home.asp

4.3.1 Market Trends

Every day, 33 babies are born in the U.S. with profound hearing loss, with another 66 babies born with partial hearing loss. This makes hearing loss the number one birth defect in America. Consequently, nearly every state in the U.S. has recently passed a law requiring that infants be screened for hearing loss.^[1] It is estimated that if children with hearing loss do not receive early intervention, special education for a child with hearing loss will cost an additional $420,000 in special education costs, and has a lifetime cost of approximately $1 million per child to society.^[2] The costs to society of untreated hearing loss are estimated to amount to $56 billion per year in the US, and $92 billion per year in Europe.^[3] For adults, lack of early intervention can lead to loss of jobs, emotional distress and even the inability to cope with cognitive disorders such as Alzheimer’s. This is important since hearing loss can begin as early as age 50. In addition, since life expectancy can nowadays realistically reach to age 90 and beyond, an individual could potentially be affected by hearing loss for half his/her entire life. Additionally, as baby boomers reach retirement age, the number of Americans with hearing loss is expected to reach nearly 60 million by 2030. Consequently, hearing care providers have a growing need for tests that will assess hearing in a realistic environment in order to provide effective intervention.

Technological advances – As technology evolves we will see advances in the way hearing tests are conducted. For instance, Starkey Laboratories, a hearing instruments developer, is launching what it claims is the first Web-based hearing check. It is doing so because it believes such a move would drive hearing aid sales.^[4] This online hearing-test method asks prospective customers to answer a series of questions before listening to different tonal sounds. Once this individual has been checked, they are given a diagnosis and, if required, a recommendation to seek professional assistance. However, this test and similar ones are merely methods devised by hearing aid manufacturers to assist consumers to perform preliminary self-diagnoses, with the ultimate goal of encouraging the individual to seek the help of a hearing professional.

Laws and Regulations – Another important development within this market is that audiologists are now able to offer their services directly to Medicare beneficiaries. Previously, Medicare required that beneficiaries with hearing loss or balance disorders obtain a physician referral before seeing an audiologist. However, as of January 1, 2004, Medicare now recognizes audiologists as autonomous health care providers. This is the result of the introduction of the “Hearing-Health Accessibility Act of 2003” (S. 1647) by the U.S. Senate. We believe that this regulation will enable audiologists to increase customer traffic. Consequently, these audiologists will continue to search for more accurate and faster ways to serve their customers. For example, the CRISP hearing test contributes to speeding the testing process to 2-3 times faster than current ones (i.e. HINT test).

Nearly every state in the U.S. has recently passed a law requiring that infants be screened for hearing loss.^[5] Screening and monitoring infant and childhood hearing loss is a growing concern as children with hearing loss often have slowed development with speech and lack of early intervention can be very costly. Consequently, these laws have generated an overall increased awareness and increased efforts to test and monitor children with hearing loss. Based on these trends, we believe that Auris Solutions’ CRISP will be an integral part of monitoring the ability of children to hear and learn in a realistic environment.

Employment Growth – In order to keep up with the increased hearing testing in infants and children, our research indicated that the number of speech-language pathology positions and audiology positions are growing by 39% and 45% respectively, from 2000-2010,[6] making these professions among the fastest growing in the country, ranked among the top 30 out of 700 professions. This is an important trend, as speech-language pathologists and therapists and audiologists make up our primary customers.

____________________________

[1] Murphy, L. “New Laws a Boon for Diagnostic Firm: Bio-Logic Focusing on Hearing Tests.” Crain’s Chicago Business: 60, Sep. 27, 1999.
[2] http://trfn.clpgh.org/shhh/Factsheet.html#r1
[3] Source: Better Hearing Institute in the USA (http://www.hear-it.org/page.dsp?forside=yes&area=138)
[4] Hearing test goes online; New Media Age: 10(1), July 18, 2002.
[5] Murphy, L. “New Laws a Boon for Diagnostic Firm: Bio-Logic Focusing on Hearing Tests.” Crain’s Chicago Business: 60, Sep. 27, 1999.

4.3.2 Market Needs

The majority of hearing-impaired individuals that use hearing-aids or that undergo surgery to receive cochlear implants expect to hear well. However, the reality is that tens of thousand of patients continue to experience severe difficulty hearing in the real world, away from the clinical setting. This is primarily due to a clinician incorrectly adjusting the settings on the medical device. Consequently, there is a large need by audiologists and speech therapists for a hearing test that can quickly and accurately predict how well individuals, with either a cochlear implant or a hearing aid, can hear in a noisy “real world” environment following installation of the medical device. Such a test is especially important for children, as early intervention can reduce slowed learning. It is estimated that if children with hearing loss do not receive early intervention, special education for a child with hearing loss will cost an additional $420,000 in special education costs and result in a lifetime cost of approximately $1 million per child.^[1] In adults, hearing loss can begin as early as age 50 and lack of early intervention can lead to loss of jobs, emotional distress and even cognitive disorders. In addition, since life expectancy can realistically reach to age 90 and beyond, an individual could potentially be affected by hearing loss for half of his/her lifetime.

Pure tone hearing tests, which require audiometers and sound proof booths to deliver the tone, are currently used to evaluate hearing loss. These tests evaluate fundamental hearing loss, but cannot predict how well an individual will understand words and sentences in a realistic environment. Current tests also cannot asses whether or not a second cochlear implant or second hearing aid would significantly improve the hearing of a patient. This is important to patients and their families as cochlear implants and hearing aids cost approximately $40,000 and $5,000, respectively, and are often not covered by insurance companies.

Key Benefits of Auris Solutions’ CRISP Test for our Target Market

Based on our analysis of the industry, competing tests, and competitors, the key benefits to audiologists that the CRISP hearing test can offer are listed in the table below.

• Can be used with young children
• Allows for 4 different types of noise sources that evaluate different types of masking signals
• Can quickly calculate speech reception thresholds, or percent correct scores for signal to noise ratio. This process is considered intellectual property and is presently patented to the Wisconsin Alumni Research Foundation (WARF).
• Tests patient’s performance hearing speech in noise
• Mimics Real-world environment
• Can be used an unlimited number of times
• Can help to fine-tune hearing aid settings
• Tests cochlear implant efficacy
• Can help to fine-tune and evaluate the effectiveness of a cochlear implant + hearing aid

For the patient, this is anticipated to become a must-have test, since it will more accurately refine his/her hearing device settings and optimize the patient’s hearing in a noisy environment. After spending nearly $5,000 for a hearing aid and/or more than $40,000 for a cochlear implant, the patient would likely expect that s/he would be able to utilize his/her hearing device to its utmost capacity in all real-world situations such as a ballgame, a concert, a cocktail party, and especially the workplace or classroom setting. Additionally, this test will also determine the efficacy of a second cochlear implant or hearing aid, or the benefits of a combination of the two. The differences between the optimal and non-optimal setting of the hearing device for the patient is stark; it can mean the difference between having emotional and mental problems associated with hearing ineffectively and the ability to enjoy a worry-free life.

Hearing Aids – The CRISP hearing test will allow audiologists to make recommendations for a hearing aid regimen; that is, specific recommendations with respect to microphone direction and noise suppression. The test can also assess whether or not a patient needs one or two hearing aids. Hearing aids typically cost $5,000 each, so this is an important decision for many patients, especially since many insurance companies do not cover this device.

Cochlear Implants – The CRISP hearing test can help with recommendations about whether a hearing aid is needed in one ear, given that there is a cochlear implant in the other ear. The test can also assess whether or not the patient needs two cochlear implants. This is a very important decision as cochlear implants cost about $25,000 on average.

Audiogram results – Sometimes an audiogram is normal, but the patient still has poor speech and understanding. Auris Solutions’ CRISP hearing test can pin-point whether or not this problem is related to competing noises or the location of noises, which may help the patient develop better speech and understanding.

Additional revenues for hearing care providers – The CRISP hearing test will also allow hearing care professionals to charge for administering the CRISP test. Typically, hearing care clinics and hospitals charge $35 to $200 per test. Therefore, we believe that audiologists and speech therapists will view this test as a value-added product.

____________________________________

[1] http://trfn.clpgh.org/shhh/Factsheet.html#r1

Auris Solutions’ sales projections include launching CRISP (June 2004), MAA (2005) and ERISP (2006). Our goal is to attain sales above $11,000,000 in 5 years.

[Proprietary and confidential information removed.]

We’re confident that once our target market adopts CRISP and they become aware of the quality and reliability of our products, they will be motivated to explore and purchase more of our offerings.

At this time, Auris Solutions is composed of 4 key individuals. They are described below.

Chief Scientific Consultant – Sarah Plauger, PhD – Sarah Plauger is the Chief Scientific Consultant. She is currently a researcher at the Waisman Center, as well as an Assistant Professor at the University of Wisconsin-Madison. Dr. Plauger has over 20 years of experience within the hearing care industry and has published over 27 peer reviewed articles in numerous industry journals. Dr. Plauger serves as a highly regarded consultant for the Cochlear Corporation, the Department of Otolaryngology at UC-Irvine, and the Laboratory of Physiology at the University of Oxford, UK.

Software Developer – Gongqiang Yu, PhD – Gongqiang Yu is the software developer behind CRISP. He is currently a researcher at the Waisman Center under the supervision of Sarah Plauger. Mr. Yu has post-doctoral training and a Ph.D. from the Department of Physics at the National University of Singapore. His area of research is psychoacoustics of directional hearing, with an emphasis on the precedence effect.

Marketing Manager – Kim-Anh To, MBA – Kim-Anh is the company’s marketing manager and co-founder. Ms. To has an MBA with a focus in Entrepreneurship/Marketing as well as a degree in Anthropology from the University of Wisconsin-Madison. Kim-Anh has over 7 years experience as a small business manager and 2 years of business consulting experience.

Business Manager – Jose O. Rivera, MBA, BSCE – Jose is the company’s business manager and co-founder. Mr. Rivera has an MBA with a focus in Entrepreneurship from the University of Wisconsin-Madison, and a degree in engineering from the Polytechnic University of Puerto Rico. He has extensive experience in managing multimillion-dollar operations and 2 years of consulting experience developing growth and marketing strategies for companies in Wisconsin.

Upon achieving a sustainable growth, Auris Solutions seeks to hire key employees to further advance the company.

6.1 Organizational Structure

Jose Orlando Rivera, Business Manager, is responsible for overall business management. All functional operations and their respective managers or employees report directly to Jose Orlando. Kim-Anh To, Marketing Manager, is responsible for all the marketing and sales efforts. Sales and marketing consultants will report to her. Both Dr Litovsky and Dr. Yu are engaged as the company’s consultants, which means that they will not collect salaries and benefits. Instead, they both will receive professional service compensations when consulting services are incurred.

As co-owners, Jose and Kim-Anh jointly develop business strategy and long-term plans. Jose is strong on creating cost-effective strategies, and management of operations and human/capital resources. Kim-Anh is strong on marketing and micro-management.

6.2 Management Team

Resumes:

José Orlando Rivera

Kim-Anh To

Ruth Y. Litovsky, PhD.

• CRISP Grants to Date

Gongqiang Yu, Ph.D.

[Proprietary and confidential information removed.]

6.3 Management Team Gaps

The one significant management gap remaining is a CEO with extensive business and industry experience. We hope that with the help of external investors, we will be able to fill this key position as soon as possible. In the meantime, Auris Solutions’ management has assembled a highly respected team of hearing industry professionals to serve on its Advisory Board. We believe that these individuals will contribute in closing the technological and business gaps that our company has at the time. They are described below.

Fan-Gang Zeng, Ph.D. – Dr. Zeng is Research Director in the Department of Otolaryngology – Head and Neck Surgery, and Director of the Hearing and Speech Research Laboratory at the University of California, Irvine. He holds a tenure Associate Professorship in four different departments including, Anatomy and Neurobiology, Biomedical Engineering, Cognitive Sciences, and Otolaryngology. Dr. Zeng has gained an international reputation for his research in neural prostheses, auditory perception, and speech processing. He has more than 50 publications in these areas including 2 papers in Science magazine and 3 patents in the design of cochlear implants.

Sigfrid D. Soli, Ph.D. – Dr. Soli is currently VP of Technology Transfer and Head of the Department of Human Communication Sciences and Devices, at the House Ear Institute in Los Angeles, CA. He is a fellow of the Acoustical Society of America and has been chair to numerous NIDCD review panels. Dr. Soli also still serves as a consultant to the Committee on Disability Determination for Individuals with Hearing Impairment, National Research Council. Dr. Soli has published more than 30 articles relating to speech and hearing, especially with regards to electrical hearing mechanisms such as hearing aids. Additionally, Dr. Soli holds 17 patents, many related to the Hearing in Noise Test (HINT) that he developed in 1993.

Jane Reger Madell, Ph.D. – Dr. Madell is the Director of the Hearing and Learning Center and Co-Director of the Cochlear Implant Center of the Beth Israel Medical Center. Dr. Madell is also Professor of Clinical Otolaryngology at the Albert Einstein College of Medicine. Dr. Madell is a licensed audiologist and is certified to practice in 3 states. Dr. Madell is a fellow of the American Speech Language Hearing Association, and was Chair of a Special Interest Group on Hearing in Childhood. Additionally, she serves on the Editorial Board of Audiology Today, an industry trade journal. Dr. Madell has published over 60 articles and books, primarily focused on hearing in children.

Mark Clear – Mr. Clear co-founded Integrated Media Solutions in 1995, and is the current CEO. Consulting extensively with clients in health care, financial services, media, technology, manufacturing, and retail sectors, Mark has a solid familiarity with current Internet issues and trends, and experience matching new technologies to real-world applications. His specialty is analyzing customer needs, helping them re-think the way they do business, and recommending Internet solutions that create efficiencies in their business processes. Mark has 18 years of experience in technology and customer service. His background includes ten years of experience in technical writing, database development, and system administration. He also serves on the board of the Four Lakes chapter of the Society for Technical Communication, and writes a periodic column on Internet business issues for the Capital Times in Madison.

Our Personnel Plan shows the deferred salaries of the principal employees and consultants, as well as our increasing use of outside software consultants in years 2 through 5, as we develop further products.

[Proprietary and confidential information removed.]

Auris is seeking $250,00 in funding to finance the start-up cost of the Company, which includes exclusively licensing CRISP technology from WARF, and making the necessary software enhancements to make CRISP ready for delivery, which would include packaging, an instruction manual, demos, and tech support. Additional funding is necessary for research and development of future hearing systems, as mentioned in the Future Products and Services Section. Finally, the additional financing will be used by Auris Solutions to purchase the necessary capital equipment needed to expand the business especially as regards to international opportunities.

Structuring Control of Auris Solutions’ Board

Auris proposes a Board consisting of three members, where one director is elected by the founders, one director elected by the investors, and a third neutral director selected by both founders and external investors or by a designated third party.

8.1 Start-up Funding

Auris is seeking $250,00 in investment funding to finance the start-up cost of the company.

8.2 The Investment Offering

Auris Solutions plans to be a privately-held, Limited Liability Corporation, with Dr. Plauger as one of the owners and the key driver of research and new product development. However, we believe that in order to attract talented management, we will need to create a stock option pool not higher than 45% of the total shares. See the table below for an ownership breakdown.

Auris proposes participating shares for our external investors in exchange for $250,000 funding. The Company is willing to offer up to 35% of equity stake in the company for the requested funding. In addition to funding, we are looking for investors with business, management and industry experience.

Auris understands that the investor’s goal is to liquefy the investment at a substantial profit when the company’s value has been maximized through astute management and careful supervision. Auris Solutions’ exit strategy is a sale of the Company within five to seven years, where the investor’s preferred participating stock would be entitled to a double dip provision. We believe that Auris Solutions could be sold for 7 to 10 times EBIT in year 5, based on comparable deals in the hearing care industry.

8.3 Funding History

To date, Auris Solutions has depended primarily on grants to finance research and operations. Auris Solutions’ CRISP has been awarded competitive grants from various federal agencies, including the National Institutes of Health (NIH), National Science Foundation (NSF), and the U.S. Department of Energy (DOE), totaling $550,000. These grants are typically awarded to companies or scientists with technology that has high potential for development and commercialization. Dr. Plauger has also applied for additional grants, in particular, the Small Business Innovation Research (SBIR) grant. The table below outlines the grants that she has received or that are currently pending:

8.4 Important Assumptions

• The CRISP hearing tests have been priced between $2,000 and $2,500, based on a market reference value plus a differentiation value. We used a price of $2,500 in our projected income statement.
• Cost of sales includes the cost of copying, packaging and printing the software and instruction manual. Cost of sales also includes per copy royalty paid to WARF, which is estimated at 10% of the retail price of the software.
• The financial projections include $100,000 of external seed funding.
• In addition to salary, the key employees of Auris Solutions, LLC will be granted stock options from the stock option pool; Dr. Plauger (also equity stakeholder) and Dr. Yu are acting as the company’s scientific officer and software developer accordingly.
• Auris Solutions plans to launch Minimum Audible Angle (MAA) and Elder’s Realistic Intelligibility and Seech Perception (ERISP) in year 2005, and software for Children with Developmental Disabilities (DD) & Mental Retardation (MR) in 2006.
• Operating expenses includes Research and Development costs of $2 million over five years. Patent amortization is straight line over 17 years.
• Income tax is assumed at 30%.

8.5 Break-even Analysis

Please note that we have calculated the cost of the proprietary software and the packaging at $418.82, with an average sale price of $2,094.12. We are not using a mark-up approach for the software pricing because the costs of developing the software are considerably low. We based our sale price of the software on comparable software available on the market (reference value) as well as testimony of various audiologists during our market research process (differentiation value).

Based on the above assumptions, the company would have to sell units as detailed in the breakeven analysis table.

8.6 Projected Profit and Loss

We plan to properly use our funding. Auris Solutions’ products are now being developed by Dr. Plauger at the Waisman Center of UW-Madison. For that reason our Research and Development expenses for 2005 are $0, which assists in minimizing costs associated with creating our future products, consequently maintaining competitive profit ratios. As shown in the Profit and Loss Statement, below, the founders will postpone their compensations, which will help in creating positive profits for the 1st year. We plan to use our consultants’ services as required.

8.7 Projected Cash Flow

Detailed projected income statements, balance sheets and cash flows for years 2004 through 2008 are included in Appendix 2. We believe that by year-end 2004 we should be able to sell 45 copies of the software, which is a very conservative estimate, as the company has already encountered a substantial amount of interest in CRISP at the various conferences and tradeshows attended by Dr. Plauger. This number is also conservative based on the number of speech therapists and audiologists, HMO Medical Centers and hospitals there are in the United States, according to the latest year 2000 census.

We believe that the majority of revenue will come from software sales. Software sales are projected to grow from 425 units for the partial-year 2004 to over 11,000 units within five years. This figure includes the introduction of ERISP and the MAA tests in year two, and the DD and MR test in year three.

An additional $4.5M (max) will be spent on Research and Development activities over the next 5 years to develop future products. Auris Solutions’ R&D effort is focused on two main areas: extension and expansion of the current proprietary technology, and research and development of new product lines. Sales and marketing expenses are expected to increase over 10% every year. This includes advertising and promotional spending to support growing product sales, as well as website maintenance; we believe that marketing will play an important role in our sales. Sales and marketing expenses exclude the travel costs for Dr. Plauger to promote her technology at various conferences.

*Note: The ‘Dividends’ row currently shows $0 for all years; actual dividend amounts will be negotiated with the investors.

8.8 Projected Balance Sheet

As shown in the balance sheet in the following table, we expect a healthy growth in net worth by the end of the plan period. The monthly projections are in the appendices.

8.9 Business Ratios

Standard business are included in the following table. These ratios correspond to the selected industry category (Application computer software, SIC code 7372.9901), which was selected to match our business.  Any discrepancy with the industry standard might be explained by our low capital needs and liabilities as well as by our low initial investment to develop our products; products are being develop by consultants at UW-Madison. However, the ratios show a plan for balanced, healthy growth. Special attention will be paid to our collection days in order to minimize the amount of days we are awaiting payment.