<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended FEBRUARY 28, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period from ________ to _________
Commission File Number: 0-11868
CARDIODYNAMICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3533362
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6175 NANCY RIDGE DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
(619) 535-0202
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No
--- ---
As of March 31, 1998, 32,100,743 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format
(check one):
Yes No X
--- ---
<PAGE> 2
CARDIODYNAMICS INTERNATIONAL CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets at February 28, 1998 (Unaudited) and
November 30, 1997 (Audited). 3
Statements of Operations (Unaudited) for the three months
ended February 28, 1998 and February 28, 1997. 4
Statements of Cash Flows (Unaudited) for the three months
ended February 28, 1998 and February 28, 1997. 5
Notes to Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIODYNAMICS INTERNATIONAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1998 1997
ASSETS (Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,138,516 $ 2,655,349
Accounts receivable, net of allowance for doubtful accounts
and returns of $124,631 and $161,824, respectively 104,137 51,568
Inventory, net 819,981 906,111
Other current assets 143,081 137,735
------------ ------------
Total current assets 3,205,715 3,750,763
Property and equipment, net 252,942 244,654
Deposits 24,983 27,788
------------ ------------
Total assets $ 3,483,640 $ 4,023,205
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 443,961 $ 295,524
Accrued expenses 26,966 22,292
Accrued salaries, wages and benefits 78,938 83,632
Note payable to bank 750,000 --
Current maturities of long-term debt 10,003 11,300
Customer deposits 990 2,995
Reserve for inventory returns 455,107 614,860
------------ ------------
Total current liabilities 1,765,965 1,030,603
Long-term debt, less current maturities 25,000 26,523
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 50,000,000 shares authorized; issued and
outstanding 32,100,743 shares at February 28,
1998 and 32,085,743 at November 30, 1997 14,841,912 14,826,762
Accumulated deficit (13,149,237) (11,860,683)
------------ ------------
Total shareholders' equity 1,692,675 2,966,079
------------ ------------
Total liabilities and shareholders' equity $ 3,483,640 $ 4,023,205
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 28,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 147,512 $ 131,928
Cost of sales 193,969 94,027
------------ ------------
Gross margin (46,457) 37,901
Operating expenses:
Research and development 537,070 172,376
Selling, general and administrative expenses 728,630 687,031
------------ ------------
Total operating expenses 1,265,700 859,407
Loss from operations (1,312,157) (821,506)
Other income (expense):
Interest, net 24,403 3,950
Loss on sales of securities -- (164,853)
Other, net -- --
------------ ------------
Total other income (expense) 24,403 (160,903)
Loss before income taxes (1,287,754) (982,409)
Income taxes (800) (800)
------------ ------------
Net loss $ (1,288,554) $ (983,209)
============ ============
Net loss per common share, basic and diluted $ (0.04) $ (0.03)
============ ============
Weighted-average number of
common shares outstanding 32,085,910 29,653,681
============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,288,554) $ (983,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 19,488 11,638
Loss on disposition of marketable securities -- 164,853
Allowance for doubtful accounts and returns (37,193) (7,084)
Changes in operating assets and liabilities:
Accounts receivable (15,376) 4,683
Inventory 86,130 (157,143)
Other current assets (5,346) 37,612
Deposits 2,805 --
Accounts payable 148,437 135,226
Accrued expenses 4,674 (24,273)
Accrued salaries, wages and benefits (4,694) 21,369
Customer deposits (2,005) (23,012)
Reserve for inventory returns (159,753) --
----------- -----------
Net cash used in operating activities (1,251,387) (819,340)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (27,776) (23,005)
Proceeds from sale of marketable securities -- 180,129
----------- -----------
Net cash provided by/(used in) investing activities (27,776) 157,124
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (2,820) (3,639)
Proceeds from bank borrowings 750,000 --
Issuance of common stock 15,150 5,541,282
----------- -----------
Net cash provided by financing activities 762,330 5,537,643
----------- -----------
Net increase (decrease) in cash and cash equivalents (516,833) 4,875,427
Cash and cash equivalents at beginning of period 2,655,349 706,190
----------- -----------
Cash and cash equivalents at end of period $ 2,138,516 $ 5,581,617
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
DESCRIPTION OF BUSINESS:
CardioDynamics International Corporation (the "Company") develops, manufactures
and markets noninvasive digital cardiac output monitoring devices, which provide
continuous data on a wide range of hemodynamic parameters (measurements of the
heart's ability to deliver oxygen-rich blood throughout the body). The Company's
primary products, the BioZ(TM) System, BioZ Portable(TM), and BioZ.com(TM), use
Thoracic Electrical Bioimpedance ("TEB") technology to obtain data which is
typically available only through a time consuming, costly, potentially dangerous
invasive procedure called Pulmonary Artery Catheterization ("PAC"). Since TEB
monitoring is noninvasive, it eliminates procedure risk and potentially
decreases the length of a hospital stay, thereby reducing patient cost.
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in accordance with the
requirements for Form 10-QSB and therefore do not include all information and
footnotes which would be presented were such financial statements prepared in
accordance with generally accepted accounting principles.
These statements should be read in conjunction with the Company's November 30,
1997 audited financial statements and notes thereto as presented in its Annual
Report on Form 10-KSB. Financial presentations for the prior periods have been
reclassified to conform with the current presentation.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature. The results of operations for the three months ended February
28, 1998 are not necessarily indicative of the results that may be expected for
the full fiscal year ended November 30, 1998.
SUBSEQUENT EVENT
In March 1998, the Company entered into an 18 month unsecured private line of
credit agreement with the co-chairmen of the Company's Board of Directors.
Under the terms of the agreement the Company may borrow up to $3,000,000 on an
as-needed basis with monthly interest-only payments at an annual interest rate
of 10%. The Company shall prepay this line of credit from the net proceeds of
any future arranged debt or equity financing.
6
<PAGE> 7
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included in this report, and with the Company's
audited financial statements and notes thereto for the fiscal year ended
November 30, 1997. Certain statements set forth herein are forward-looking and
involve risks and uncertainties. For information regarding potential factors
that could have a material adverse effect on the Company's business, operating
results, and financial condition refer to the Company's November 30, 1997 Form
10-KSB and page 11 of this report.
Results of Operations (Quarters referred to herein are fiscal quarters ended
February 28)
The Company received FDA 510(k) marketing clearance for the BioZ(TM) System in
late November 1996 and in September 1997, the Company received 510(k) marketing
clearance from the FDA for its BioZ Portable monitoring system. In March 1998,
the Company received 510(k) marketing clearance for the BioZ.com, the Company's
next generation monitoring system. The BioZ.com is even more compact than the
BioZ Portable and features a transport battery, integrated blood pressure module
and direct data interface to most hospital central monitoring systems. The
BioZ.com is the first product to fully utilize the Company's proprietary Dynamic
Impedance Signal Quantifier (DISQ(TM)) technology which provides improved
measurement of impedance waveforms and automatic electronic calibration. These
FDA clearances provide the Company the opportunity to commercialize the three
products, which could result in significantly increased sales.
Net sales for the first quarter of fiscal 1998 increased 12% to $147,512 from
$131,928 in the first quarter of fiscal 1997. Sales in the 1998 period reflect
shipments to end-users of the Company's products whereas sales in the 1997
period were primarily shipments to specialty distributors for demonstration and
stocking purposes. As a result of the Company's decision in the fourth quarter
of fiscal 1997 to add a direct sales force, a reserve for distributor returns
was established. The $776,540 reserve represented 100% of sales to domestic
distributors which, as of November 30, 1997, had not been resold to end-users.
During the first fiscal quarter of 1998, the Company terminated five distributor
agreements and agreed to take back $286,460 of equipment which had been fully
reserved. Of the original reserve for returns, $579,594 remains at February 28,
1998.
The Company shipped 11 BioZ Systems to end-users in the first quarter of fiscal
1998 compared with six in the same period of 1997. Four of the first quarter
1998 end-user shipments were under the Company's new "No Risk" and "Preferred
Partnership" rental programs, whereby a BioZ System and disposable sensors are
provided to targeted accounts at no cost, for up to six months, in exchange for
a minimum monthly usage-based charge. The Company believes that allowing
clinicians the opportunity to experience the clinical benefits and cost savings
of the BioZ System, without the risk typically associated with a capital
equipment purchase, will result in greater knowledge and acceptance of the
Company's products and provide local reference sites to facilitate additional
sales.
7
<PAGE> 8
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations (Continued)
The Company experienced a negative gross margin in the first quarter of fiscal
1998 compared with a 29% gross margin in the first quarter of fiscal 1997
primarily due to the low sales volume relative to the Company's fixed
manufacturing overhead and expenses related to BioZ Systems built and shipped
under the Company's new rental programs for which only $6,600 of revenue was
recognized. The gross margins are expected to improve as average unit sales
price increase as a result of direct end-user sales and as the Company's
manufacturing capacity is more fully utilized. However, significant increases in
sales will be required to enable the Company to achieve profitability.
Selling, general and administrative costs for the three months ended February
28, 1998 increased 6% over the same period of fiscal 1997 due to the Company's
strategic investment in sales and marketing related activities which rose by 19%
in the first quarter of fiscal 1998 over the corresponding 1997 quarter. The
majority of the increase was related to the costs associated with addition of
direct sales personnel, development of advertising and marketing materials for
the BioZ.com, and the addition in June 1997 of a Chief Operating Officer to
coordinate and direct the clinical, customer service, sales and marketing teams.
The Company's investment in sales activities is expected to continue to increase
as it expands its direct sales force and develops selling and marketing
materials customized for direct sales targeted at both the hospital and
outpatient markets. As a result of ongoing cost containment efforts, general and
administrative expenses were reduced by 5% in the first fiscal quarter of 1998
compared with 1997's same quarter.
The Company has also determined to invest a significant portion of its resources
into research, clinical studies, further enhancements to the BioZ product line,
and new product development. As a result, research and development expenses
increased by $364,694 or 212% in the first quarter of fiscal 1998 over last
year's same quarter. Most of the increase is due to contracted engineering
activities related to development of the BioZ.com which was completed in just
nine months, from marketing specification to FDA 510(k) clearance.
The Company recorded $25,478 in interest income and $1,075 of interest expense
in the first three months of fiscal 1998 compared with interest income of $5,806
and interest expense of $1,856 in the same three month period of fiscal 1997.
The increased interest income is due to more funds available for investment and
higher rates of interest earned throughout the period.
8
<PAGE> 9
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations (Continued)
In the first quarter of 1997, the Company recognized a loss of $164,853 related
to the disposition of certain marketable securities. These securities had been
held for payment to preferred shareholders upon exercise of a right to redeem
their preferred shares for common stock and a pro-rata portion of the proceeds
of the marketable securities. Because the time for exercising the redemption
right had expired, the Company sold the securities to provide additional cash
for operating activities.
The Company incurred a net loss for the first quarter of 1998 of $1,288,554 or
$.04 per common share compared with a net loss of $983,209 or $.03 per common
share in the same quarter last year. The weighted average common share increase
was primarily due to the automatic conversion in August 1997 of 183,115 shares
of the Company's preferred stock into common stock and the issuance of
approximately 2.5 million common shares in a private placement through EVEREN
Securities, Inc., in early 1997.
Liquidity and Capital Resources
To help assure the availability of financial resources and provide the working
capital required for growth, the Company established a secured revolving credit
line with a bank. The credit line provides for borrowing of up to $2,000,000 at
the bank's prime rate plus 0.25%. At February 28, 1998, the Company had $750,000
outstanding under the credit line.
In March 1998, the Company entered into an 18 month unsecured private line of
credit agreement with the co-chairmen of the Company's Board of Directors. Under
the terms of the agreement the Company may borrow up to $3,000,000 on an
as-needed basis with monthly interest-only payments at an annual interest rate
of 10.0%. Equity or debt financing to replace this credit agreement and to
provide additional capital will be necessary in the relatively near future.
Without such additional debt or equity financing, the ability of the Company to
execute the transition to a direct sales strategy will be constrained, due to
the strategy's higher cash requirements. Longer term, the Company's liquidity
will depend on its ability to successfully commercialize the BioZ product line
and other diagnostic products and raise additional funds through public or
private financing, bank loans, collaborative relationships or other
arrangements. There can be no assurance that such additional funding will be
available on terms attractive to the Company, or at all.
9
<PAGE> 10
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In March 1998, the Company received 510(k) marketing clearance from
the FDA for its BioZ.com, the Company's next generation,
noninvasive cardiac function monitoring system. The BioZ.com
features a transport battery, integrated blood pressure module,
direct data interface with most hospital central monitoring
systems. The BioZ.com is the first product to fully utilize the
Company's proprietary Dynamic Impedance Signal Quantifier
(DISQ(TM)) technology, cleared by the FDA in September 1997. DISQ
provides improved impedance waveform measurement and automatic
electronic calibration, thereby increasing the repeatability and
reliability of TEB measurements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
10
<PAGE> 11
CARDIODYNAMICS INTERNATIONAL CORPORATION
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements include statements regarding plans, goals, strategies,
intent, beliefs or current expectations of the Company and its management. These
statements are expressed in good faith and are believed to have a reasonable
basis when expressed, but there can be no assurance that these expectations will
be achieved or accomplished. Sentences in this document containing verbs such as
"plan," "intend," "anticipate," "target," "estimate," "expect," etc., and/or
future-tense or conditional constructions ("will," "may," "could," "should,"
etc.) constitute forward-looking statements that involve risks and
uncertainties. Items contemplating, or making assumptions about, actual or
potential future sales, market size, collaborations, trends or operating results
also constitute such forward-looking statements. Among the factors that could
cause the Company's actual results to differ materially from those indicated in
any such forward-looking statements are: (i) sole dependence on the
newly-introduced BioZ(TM) System, BioZ Portable(TM) and BioZ.com(TM) and related
products, (ii) general acceptance in the medical community of invasive
procedures such as PAC and lack of general acceptance in the medical community
of TEB, (iii) its ability to raise additional funds on terms attractive to the
Company, or at all, (iv) competition from Baxter Healthcare Corporation, the
maker of the Swan-Ganz(TM) PAC device, and (v) various uncertainties
characteristic of companies just emerging from the development stage; as well as
other risks detailed in the Company's annual report on Form 10-KSB for the
fiscal year ended November 30, 1997 and any later-filed SEC reports. Any
forward-looking statement speaks only as of the date on which the statement is
made, and the Company does not undertake to update the disclosures contained in
this document or reflect events or circumstances that occur subsequently or to
reflect the occurrence of unanticipated events.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CARDIODYNAMICS INTERNATIONAL CORPORATION
Date: April 14, 1998 By: /s/ MICHAEL K. PERRY
-------------- --------------------------------
Michael K. Perry
Chief Executive Officer
Date: April 14, 1998 By: /s/ STEPHEN P. LOOMIS
-------------- --------------------------------
Stephen P. Loomis
Vice President, Finance
Chief Financial Officer and
Corporate Secretary
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER ENDED
FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 2,138,516
<SECURITIES> 0
<RECEIVABLES> 228,768
<ALLOWANCES> 124,631
<INVENTORY> 819,981
<CURRENT-ASSETS> 3,205,715
<PP&E> 511,256
<DEPRECIATION> 258,314
<TOTAL-ASSETS> 3,483,640
<CURRENT-LIABILITIES> 1,765,965
<BONDS> 0
0
0
<COMMON> 14,841,912
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,483,640
<SALES> 147,512
<TOTAL-REVENUES> 147,512
<CGS> 193,969
<TOTAL-COSTS> 1,265,700
<OTHER-EXPENSES> (24,403)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,287,754)
<INCOME-TAX> (800)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,288,554)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
