<PAGE>
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 August 31, 2000
[_] 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
(State or other jurisdiction 95-3533362
of incorporation or organization) (IRS Employer Identification No.)
6175 Nancy Ridge Drive, Suite 300,
San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(858) 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 _____
As of October 11, 2000, 45,518,475 shares of common stock were outstanding.
Transitional Small Business Disclosure Format
(Check one):
Yes ____ No X
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<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets at August 31, 2000 (unaudited) and
November 30, 1999 (audited). 3
Statements of Operations (unaudited) for the three and
nine months ended August 31, 2000 and August 31, 1999. 4
Statements of Cash Flows (unaudited) for the nine
months ended August 31, 2000 and August 31, 1999. 5
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
Assets (Unaudited) (Audited)
--------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,961,134 $ 2,405,710
Accounts receivable, net of allowance for doubtful accounts
and returns of $739,969 in 2000 and $552,648 in 1999 4,394,648 4,226,470
Inventory, net 2,030,486 1,344,527
Other current assets 714,199 116,070
--------------- ---------------
Total current assets 22,100,467 8,092,777
Property and equipment, net 530,762 335,760
Long-term receivables and note receivable 1,120,203 25,973
Deposits 23,802 42,500
--------------- ---------------
Total assets $ 23,775,234 $ 8,497,010
=============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,265,819 $ 1,125,068
Accrued expenses 136,398 183,910
Accrued salaries, wages and benefits 452,338 309,083
Deferred service revenue 14,490 --
Line of credit -- 1,000,000
Current maturities of long-term debt 91,000 885,932
Note payable - related parties -- 1,000,000
--------------- ---------------
Total current liabilities 1,960,045 4,503,993
Long-term debt, less current maturities 103,788 1,350,425
--------------- ---------------
Total liabilities 2,063,833 5,854,418
Shareholders' equity:
Common stock, no par value; 100,000,000 shares authorized;
issued and outstanding 45,376,748 shares at August 31, 2000
and 39,888,811 shares at November 30, 1999 44,646,133 24,079,981
Accumulated deficit (22,934,732) (21,437,389)
--------------- ---------------
Total shareholders' equity 21,711,401 2,642,592
--------------- ---------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 23,775,234 $ 8,497,010
=============== ===============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------------- --------------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 3,572,971 $ 2,073,582 $ 9,270,234 $ 4,676,989
Cost of sales 1,143,815 716,117 2,993,102 1,681,515
-------------- -------------- -------------- --------------
Gross margin 2,429,156 1,357,465 6,277,132 2,995,474
Operating expenses:
Research and development 646,650 682,705 1,792,779 1,524,530
Selling, general, and
administrative 2,281,301 1,680,044 5,998,127 4,233,654
-------------- -------------- -------------- --------------
Total operating expenses 2,927,951 2,362,749 7,790,906 5,758,184
-------------- -------------- -------------- --------------
Loss from operations (498,795) (1,005,284) (1,513,774) (2,762,710)
Other income (expense):
Interest income 136,374 38,908 250,577 68,409
Interest expense (67,096) (71,591) (215,854) (235,089)
Other, net (13,685) (494,259) (17,492) (495,284)
-------------- -------------- -------------- --------------
Total other income (expense) 55,593 (526,942) 17,231 (661,964)
-------------- -------------- -------------- --------------
Loss before income taxes (443,202) (1,532,226) (1,496,543) (3,424,674)
Income taxes -- -- (800) (800)
-------------- -------------- -------------- --------------
Net loss before preferred
stock dividends (443,202) (1,532,226) (1,497,343) (3,425,474)
Preferred stock dividends -- (194,310) -- (226,030)
-------------- -------------- -------------- --------------
Net loss to common shareholders $ (443,202) $ (1,726,536) $ (1,497,343) $ (3,651,504)
============== ============== ============== ==============
Net loss per common share, basic
and diluted $ (.01) $ (.04) $ (.04) $ (.10)
============== ============== ============== ==============
Weighted-average number of common
shares outstanding 43,517,874 39,502,444 42,367,288 35,103,427
============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
-------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,497,343) $ (3,425,474)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 140,110 74,593
Change in allowance for warranty repairs (98,431) 91,743
Change in allowance for doubtful accounts and returns 187,321 103,919
Change in allowance for inventory reserves (194,284) 49,667
Warrants issued for access to technology -- 350,479
Non-cash expense for retirement of Series A preferred stock -- 483,333
Non-cash stock compensation expense 23,370 --
Other non-cash items (19,313) --
Changes in operating assets and liabilities:
Accounts receivable (355,499) (2,734,297)
Inventory (491,675) (387,840)
Other current assets (598,129) (65,817)
Deposits 18,698 (3,346)
Accounts payable 140,751 319,263
Accrued expenses 50,919 118,546
Accrued salaries, wages and benefits 143,255 54,217
Long-term receivables and note receivable (1,094,230) --
Deferred service revenue 14,490 --
-------------- --------------
Net cash used in operating activities (3,629,990) (4,971,014)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (269,144) (38,932)
-------------- --------------
Net cash used in investing activities (269,144) (38,932)
-------------- --------------
</TABLE>
(Continued)
See accompanying notes to financial statements.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Cash Flows - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
-------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from financing activities:
Repayment of long-term debt (2,062,844) (2,031,766)
Repayment of note payable - related party (1,000,000) --
Repayment of revolving line of credit (1,000,000) (815,615)
Borrowings on revolving line of credit -- 815,615
Proceeds from bank borrowing -- 2,000,000
Preferred stock issuance costs -- (7,070)
Exercise of warrants and options 2,272,779 151,507
Redemption of common stock (2,196,642) --
Issuance of common stock, net 20,441,265 5,100,600
-------------- --------------
Net cash provided by financing activities 16,454,558 5,213,271
-------------- --------------
Net increase in cash and cash equivalents 12,555,424 203,325
Cash and cash equivalents at beginning of period 2,405,710 2,633,086
-------------- --------------
Cash and cash equivalents at end of period $ 14,961,134 $ 2,836,411
============== ==============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
(Unaudited)
Description of Business
CardioDynamics International Corporation is a medical technology and information
solutions company that develops, manufactures, and markets noninvasive heart-
monitoring devices using our proprietary patented impedance cardiography (ICG)
technology. Our devices noninvasively monitor the heart's ability to deliver
blood to the body by measuring 12 significant hemodynamic (blood flow)
parameters. The most prevalent parameter is cardiac output, or the amount of
blood pumped by the heart each minute. Our lead product, the BioZ.com(R), has
been cleared by the Food and Drug Administration (FDA) and carries the CE mark.
We sell to US physicians through our own direct sales force and internationally
through a network of distributors. In addition, we sell our products to
domestic hospitals and other select international markets through a strategic
alliance with General Electric Marquette Medical Systems. In September 1998,
the Health Care Financing Administration (HCFA) mandated Medicare reimbursement
for our BioZ(R) procedures. Our current installed base consists of over 930
units placed in approximately 500 physician offices and hospital sites
throughout the world.
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 the information
and footnotes which would be presented if these financial statements had been
prepared in accordance with generally accepted accounting principles.
These statements should be read along with the Financial Statements and Notes
that go along with our audited financial statements, as well as the other
financial information for the fiscal year ended November 30, 1999 as presented
in our Annual Report on Form 10-KSB. Financial presentations for prior periods
have been reclassified to conform to current year presentation.
In our opinion, the information contained in this report reflects all
adjustments necessary to make the financial position and results of operations
for the interim periods a fair statement of our operations and cash flows. All
such adjustments are of a normal recurring nature. The results of operations
and cash flows for the three and nine months ended August 31, 2000 are not
necessarily indicative of the results that may be expected for the full fiscal
year ended November 30, 2000. Options and warrants to purchase 5,991,679 and
6,646,550 shares of common stock were outstanding at August 31, 2000 and August
31, 1999, respectively. These shares were not included in the computation of
loss per share because the effect would be anti-dilutive.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
(Unaudited)
Common Stock Private Placement
On December 3, 1999 we completed a $3.3 million dollar private placement of
common stock to four European institutional investors which purchased
unregistered shares with a four-month holding period for $2.50 per share,
representing a 9% discount from the 30-day average closing bid price.
On July 25, 2000 we completed another private placement of common stock
resulting in net proceeds to the Company of approximately $15.1 million dollars.
The investor group, comprising several domestic and international healthcare
institutional investors, purchased unregistered shares of common stock at $5.59
per share, a 13% discount to the 20-day weighted average closing price as of
June 21, 2000.
Debt
In February of 2000 we renewed our secured revolving credit line with Imperial
Bank. The credit line provides for borrowing of up to $3,000,000 at the bank's
prime rate through January 2001. The credit line is collateralized by all the
assets of our company and subject to certain covenants. At August 31, 2000, we
had no borrowings under the credit line.
In February of 1999 we entered into a three-year $2,000,000 unsecured term loan
agreement with City National Bank. Under the terms of the agreement we borrowed
$2,000,000 with monthly interest only payments for the first 12 months at the
bank's prime rate. During the second fiscal quarter of 2000 we began making
monthly principal installments of $83,333 each, plus interest at one percent
above the bank's prime rate. In connection with the loan, we issued to the bank
50,000 warrants to purchase our common stock at $2.20 per share. The co-
chairmen of our Board of Directors guaranteed the loan. During the quarter
ended August 31, 2000, the loan was repaid in full.
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with the co-chairmen of our Board of Directors. Under the terms of
the agreement we could borrow up to $3,000,000 on an as-needed basis with
monthly interest-only payments at an annual interest rate of 10.0%. In August
of 1998 we borrowed $1,000,000 on this line of credit and used the proceeds to
reduce outstanding borrowings under the bank term loan. During the quarter
ended August 31, 2000, the loan was repaid in full.
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<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
(Unaudited)
Long-Term Receivables & Note Receivable
In March 2000, we entered into a license and purchase agreement with Profiles in
Health, Inc., a privately held California Corporation presently in the capital
formation stage. Under the terms of the agreement, we will provide custom ICG
monitors and disposable sensor sets over a five-year period. In the first year,
Profiles in Health may finance 50% of the purchase price of the monitors and 40%
of the purchase price of the disposable sensors, in the form of a three-year
convertible secured promissory note. In the second year, the amounts that may
be financed are reduced to 15% to 23% on the monitors and 20% to 25% on the
disposable sensors. There is no financing commitment after the second year.
The note bears interest at 9% per annum and is convertible, at our option, into
a maximum of three percent of Profiles in Heath stock, based on their next round
of financing valuation. Certain assets of Profiles in Health, as well as their
contract revenue stream resulting from the installed base of profiling systems
secure the note. Under the terms of the agreement, we have a right to suspend
performance should Profiles in Health become delinquent on any amounts due us.
During the third fiscal quarter, the Company financed the sale of BioZ systems
to certain customers. The receivables vary in maturity from 36 to 60 months.
The fair value of the long-term receivable is estimated by discounting the
future cash flows using an interest rate of 8.5%. At August 31, 2000, the fair
value of the receivable approximated the carrying value.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read along with the Financial Statements and
Notes to our audited financial statements, as well as the other financial
information for the fiscal year ended November 30, 1999. Some of our discussion
is forward-looking and involves risks and uncertainties. For information
regarding risk factors that could have a material adverse effect on the
Company's business, refer to our November 30, 1999 Form 10-KSB and page 19 of
this report.
CardioDynamics International Corporation is a medical technology and information
solutions company that develops, manufactures, and markets noninvasive heart-
monitoring devices using our proprietary patented BioZ impedance cardiography
(ICG) technology. Our devices noninvasively monitor the heart's ability to
deliver blood to the body by measuring 12 significant hemodynamic (blood flow)
parameters. The most prevalent parameter is cardiac output, or the amount of
blood pumped by the heart each minute. Our lead product, the BioZ.com(R), has
been cleared by the FDA and carries the CE mark. We sell to US physicians
through our own direct sales force and internationally through a network of
distributors. In addition, we sell our products to domestic hospitals and other
select international markets through a strategic alliance with General Electric
Marquette Medical Systems. In September 1998, the Health Care Financing
Administration mandated Medicare reimbursement for our BioZ(R) procedures.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Our products help physicians assess, diagnose and treat cardiovascular disease,
which is the number one killer of adults in the United States. According to the
American Heart Association (AHA), approximately one in five Americans have some
form of cardiovascular disease. The AHA estimates that over $300 billion will
be spent in the United States during 2000 as a result of cardiovascular disease
and stroke. This figure includes both the direct costs associated with
physicians and other professionals, hospital and nursing home services,
medication and the indirect costs associated with lost productivity resulting
from morbidity and mortality.
Electrocardiography (EKG or ECG) is a widely used noninvasive assessment of the
heart, however, it is limited in that it only measures the electrical
characteristics of the heart. Our ICG technology makes it possible to
noninvasively measure the mechanical function of the heart. Conditions that
can impact the proper mechanical functioning of the heart include hypertension
(high blood pressure), congestive heart failure, pulmonary disease, high-risk
pregnancy and kidney dysfunction. Our technology complements the EKG and
supplements information obtained through the five vital signs - heart rate,
respiration rate, body temperature, blood pressure and oxygen saturation -
immediately, safely and cost effectively. We consider noninvasive cardiac
output to be the "Sixth Vital Sign(TM)."
The primary method currently being used to measure hemodynamic parameters is
pulmonary artery catheterization (PAC). The invasive, costly and risky PAC
procedure requires hospitalization and involves an incision into the patient's
neck or groin region and the insertion of a catheter (plastic tube) through the
heart directly into the pulmonary artery. Complications associated with this
procedure occur in as many as one in four reported cases and include irregular
heartbeats, infection, pulmonary artery rupture and death.
Because of the high risk of complications, physicians generally perform PAC only
on critically ill patients. Because PAC is not available in the physician's
office or outpatient clinic, in the great majority of situations the physician
seeking to diagnose cardiovascular disease must indirectly assess the patient's
hemodynamic status by measuring blood pressure, checking the pulse, looking at
neck veins and employing subjective examination techniques that are prone to
human error. A compelling need exists for objective, safe, cost-effective
noninvasive measurement tools, such as our BioZ(R) systems, that physicians can
safely prescribe more frequently and at an earlier stage in treatment.
During ICG monitoring using our BioZ(R) systems, an undetectable electrical
signal is transmitted through the chest via four proprietary sensors on the
patient's neck and chest. Our sophisticated Digital Impedance Signal Quantifier
(DISQ(TM)) technology and impedance modulating aortic compliance (ZMARC(TM))
algorithm analyze and record 12 hemodynamic parameters. Based on this data, a
physician can assess the patient's condition, customize treatment, monitor
patient compliance, analyze the effectiveness of prescribed medications and more
accurately identify potential complications.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Results of Operations (Quarters referred to herein are fiscal quarters ended
---------------------
August 31.)
For our third fiscal quarter ended August 31, 2000 net sales were $3,572,971, an
increase of approximately $1.5 million, or 72%, over net sales for the fiscal
quarter ended August 31, 1999 of $2,073,582. For the nine months ended August
31, 2000 net sales grew to $9,270,234 nearly doubling from the $4,676,989
achieved in the same nine-month period in fiscal 1999.
By the end of the third quarter we had increased our direct sales force to 34
representatives, including 27 territory managers, nine of which were hired near
the end of the quarter. Our direct sales force targets physician offices and
hospitals in the US with fewer than 100 beds. In addition, we added two
clinical sales specialists to our sales team during the quarter. These
clinical sales specialists will assist in three primary areas: pre-sales
activities including demonstrations, in-servicing post-sale customers, and on-
going customer support to increase customer satisfaction and drive recurring
revenues. We plan to continue to expand our direct sales force and the number
of clinical sales specialists in the balance of fiscal 2000 and beyond.
As a result of the increased working capital available from our July 25, 2000
private placement of common stock, we offered an in-house financing program that
provided a means for customers to purchase a BioZ system and finance it for up
to 60 months. This new program was well received by our customers and accounted
for approximately 25% of our net sales for the quarter.
On July 11, 2000 we announced an agreement with GE Marquette to jointly develop
and integrate our proprietary BioZ(R) Impedance Cardiography (ICG) technology
into GE Marquette's Solar(R) patient monitoring systems. The BioZ ICG module is
expected to be available in Solar patient monitoring systems in the first half
of 2001. The agreement expanded the existing business relationship between our
companies. GE Marquette Medical Systems has exclusive rights to market and sell
our BioZ.com(TM) in select international markets and in US hospitals with more
than 100 beds. GE Marquette has a significant presence in the hospital market
and is widely recognized for their success at introducing new technologies,
particularly in the areas of diagnostic cardiology, clinical information
systems, and patient monitoring systems. Subsequent to our third fiscal
quarter, in September 2000, we further expanded our distribution agreement with
GE Marquette to include Japan, the world's second largest healthcare market.
In March 2000, we entered into a license and purchase agreement with Profiles in
Health, Inc., a California corporation that provides a variety of healthcare
data and support services for many disease states, infection control, and
exposure management. The agreement calls for us to provide 5,300 custom ICG
monitors and 21.5 million disposable sensor sets over a five-year period. The
agreement contemplates a three-phase development program whereby we will develop
and provide custom ICG components and sensors for their Proveillance(TM) System
for use by health care providers and managed care organizations throughout the
US.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (Continued)
---------------------
On July 6, 2000, we received FDA 510(k) clearance for the BioZ.pc(TM) System.
The BioZ.pc(TM) is the central element of the phase two ICG monitoring solution
for integration into the Profiles in Health profiling system. During our third
fiscal quarter of 2000, we commenced shipments of the BioZ.pc(TM) to Profiles in
Health, shipping the final 10 phase one BioZ monitors and the initial 17 phase
two BioZ.pc(TM) monitors.
Our direct sales force accounted for 76% of our net sales during the third
fiscal quarter of 2000, 16% was sold to our distributors and 8% was sold to
Profiles in Health. The BioZ.com(TM) accounted for 93% of our overall equipment
sales in the third quarter of fiscal 2000.
Each time our BioZ products are used, disposable sets of four dual sensors are
required. The disposable sensors have a list price of $9.95 per application.
Recurring revenue, which is primarily related to sensor sales, for our third
quarter 2000 was $260,800, an increase of 159% over last year's same quarter
revenue of $100,800. This brings the total for the first nine months of fiscal
2000 to $698,900, as compared to the first nine months of fiscal 1999, with
recurring revenues of $190,000.
In May 2000, we received FDA 510(k) clearance for our new proprietary
"BioZtect(TM)" sensor. The BioZtect(TM) sensor offers notable improvements in
performance and safety. Its unique shape, chemical composition, adhesion
characteristics and more user-friendly design optimize signal transmission and
detection sensitivity. The new sensor and cable system has a proprietary
interface to ensure that customers exclusively use the BioZtect(TM) with our
BioZ systems. As the installed base of BioZ equipment grows, we expect the
revenue generated by our disposable sensors to constitute an increasingly larger
percentage of overall sales.
Our gross margin for the quarter ended August 31, 2000 increased to $2,429,156,
or 68.0% of sales, up from $1,357,465 or 65.5% of sales in the third quarter of
fiscal 1999. For the nine months ended August 31, 2000, our gross margin was
$6,277,132, or 67.7% of sales, up from $2,995,474, or 64.0% of sales for the
nine months ended August 31, 1999. The improvement in our gross margin
percentage during this fiscal quarter is attributable to a higher average unit
sales price resulting from a greater percentage of our products being sold
through our direct sales force along with reduced direct material costs due to
higher quantity purchases and concerted cost reduction efforts.
Over the past year, we have continued to increase our internal research and
development capabilities through the hiring of additional staff, thereby
decreasing our reliance on outside engineering consulting services. Last year
we recorded $682,705 of research and development expenses in the third fiscal
quarter, which included a non-cash charge of $350,479 related to the vesting of
the first one million warrants issued to obtain access to GE Marquette's
technology. Our investment in research and development during the third fiscal
quarter of 2000 increased to $646,650, up 95% from the same quarter one year
ago, excluding the non-cash charge last year.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (Continued)
---------------------
We continue to invest a significant portion of our resources in research,
clinical studies, further enhancements to the BioZ.com(TM) systems, joint
technology and new product development. As a result, our research and
development expenses continue to represent a substantial portion of our overall
expense structure.
Selling, general and administrative expenses for the third fiscal quarter of
2000 were $2,281,301, a 36% increase over the $1,680,044 incurred during the
same period in fiscal 1999. For the nine months ended August 31, 2000, selling,
general and administrative expenses increased to $5,998,127, up 42% over the
same period of fiscal 1999. The majority of the increases are the result of
continued expansion of our domestic direct sales force, the addition of several
new clinical sales specialists and continued expansion of our distribution
capabilities. By the end of the third quarter of fiscal 2000, we had 34 direct
sales representatives, up from 21 in the third quarter of fiscal 1999. In
addition, we added two clinical sales specialists to the sales team during the
quarter. We plan to continue to expand our direct sales force and increase our
investment in sales and marketing activities during the balance of fiscal 2000
and beyond. Selling and marketing expenses constituted 80% and 77% of total
selling, general and administrative expenses for the nine months ended August
31, 2000 and 1999, respectively.
Included in selling, general and administrative expense for the third quarter of
fiscal 2000 was $465,893 of administrative expenses related to the overall
infrastructure and management of the company, an increase of 29% over general
and administrative expenses of $361,479 incurred during the third fiscal quarter
of 1999. A portion of the increase can be attributed to higher costs incurred
in connection with printing and mailing proxies for our annual meeting due to
the continued growth of our shareholder base, from approximately 3,500
shareholders last year to 13,000 shareholders this year. We continue to target
our investments to areas of the business that directly contribute to revenue
growth and as a result, our general and administrative expenses continued to
decrease as a percentage of sales, from 21% for the first nine months of fiscal
1999 to 13% for the nine months ended August 31, 2000.
In August 1999, we issued two million warrants to GE Marquette in conjunction
with the commencement of our strategic alliance. In the third quarter of 1999
we recorded a non-cash charge, in research and development, of $350,479 related
to the vesting of the first million warrants issued to obtain access to their
technology. This access has allowed us to commence development and integration
of our proprietary ICG technology into GE Marquette's patient monitoring
systems. The second one million warrants are performance based, and will vest
and be expensed in our fourth fiscal quarter based on the then fair value,
provided GE Marquette meets the minimum sales objectives contemplated in its
distribution agreements with us. Each warrant represents the right to purchase
one share of our common stock for $4.10, through August 25, 2004.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations (Continued)
---------------------
As a result of nearly $3 million of debt repayment near the end of our third
fiscal quarter of 2000, interest expense for the third quarter of 2000 was
$67,096, down slightly from the $71,591 incurred during the same quarter of
fiscal 1999. For the nine months ended August 31, 2000, interest expense was
$215,854 compared with $235,089 for the nine months ended August 31, 1999. We
earned $136,374 of interest income on our invested funds in the third quarter of
fiscal 2000, up from the $38,908 earned in the third quarter of 1999. For the
first nine months of fiscal 2000, interest income was $250,577, compared to
$68,409 for the first nine months of fiscal 1999. The increases in both fiscal
periods are primarily due to higher rates of interest earned and increased funds
available for investment throughout the periods.
In the third quarter last year, in order to achieve an orderly conversion of the
outstanding shares of our Series A convertible preferred stock with a minimum
impact on the market price of our common stock, we identified a group of
strategic investors and facilitated the private sale of the common shares issued
upon conversion of the remaining portion of the preferred stock by reducing the
effective purchase price. As a result of the Series A preferred stock
retirement, we recorded a non-cash charge of $491,954 in last year's third
fiscal quarter which was recorded in "other, net".
In the third quarter last year, we recorded a $191,564 preferred stock dividend
non-cash charge related to premium-priced warrants issued to the Series A
preferred stock investors in exchange for the elimination of their contractual
right to buy an additional three million dollars of convertible preferred stock.
We paid $2,746 and $34,446 in preferred stock dividends in the third quarter and
first nine months of fiscal 1999, respectively, prior to elimination of the
preferred stock during the quarter.
The net loss to common shareholders for the third quarter of fiscal 2000 was
reduced to $443,202, or $.01 per common share, from $1,726,536, or $.04 per
common share for the third quarter. For the nine months of fiscal 2000, our net
loss to common shareholders was $1,497,343, or $.04 per common share, down from
$3,651,504, or $.10 per common share for the first nine months of fiscal 1999.
The weighted average number of common shares outstanding during the first nine
months of 2000 increased by 21%, primarily due to the conversion during fiscal
1999 of our Series A preferred stock into common stock, shares issued in our
equity financings as well as the exercise of warrants and options during the
period.
-14-
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
-------------------------------
In May of 1999, we raised $5.2 million through a private placement of common
stock to institutional and accredited investors, in December 1999, we raised
$3.3 million, and in July 2000, we raised $18.7 million (net $15.1 million)
through a common stock private placement. To date, these financings, together
with the bank loans and lines of credit described below, have provided the
capital required to fund initial commercialization of our BioZ products, ongoing
research and development efforts, expansion of our direct sales force and
international sales presence, capital expenditures and to meet our working
capital requirements.
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with the co-chairmen of our Board of Directors. Under the terms of
the agreement we can borrow up to $3,000,000 on an as-needed basis with at an
annual interest rate of 10.0%. In August of 1998 the Company borrowed
$1,000,000. In February 1999, this line of credit was extended to September 30,
2000. During the quarter ended August 31, 2000, the loan was repaid in full.
On February 26, 1999 we entered into a three-year $2,000,000 unsecured term loan
agreement with City National Bank at the bank's prime rate. The co-chairmen of
our Board of Directors guaranteed the loan. Under the terms of the agreement we
made interest only payments through March 2000, after which, we began making
monthly principal installments of $83,333 each, plus interest at one percent
above the bank's prime rate. During the quarter ended August 31, 2000, the loan
was repaid in full.
In January 1999, we established a secured revolving credit line with Imperial
Bank. The credit line provides for borrowings of up to $3,000,000 at the bank's
prime rate. Under the terms of the agreement, we are required to meet certain
loan covenants, including maximum quarterly losses. All the assets of our
company collateralize the credit line. In February 2000, the credit line was
renewed through January 14, 2001 at the bank's prime rate with the same
borrowing limit of $3,000,000. At August 31, 2000 there were no borrowings
under the line of credit.
We expect our operating losses and cash usage to continue through at least the
short term. Longer term, our liquidity will depend on our ability to
successfully commercialize the BioZ(TM) systems and other diagnostic products
and raise additional funds through public or private financings, bank loans,
collaborative relationships or other arrangements. We can give no assurance
that such additional funding will be available on terms attractive to us, or at
all.
-15-
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Accounting Developments
------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 requires
that entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This Statement was amended by SFAS 137, which deferred the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133, as
amended by SFAS 137 and SFAS 138, is effective for the first quarter in the
fiscal year ending June 29, 2001. Adoption of this standard is not expected to
have a material effect on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB101) "Revenue Recognition in Financial
Statements." SAB101 summarizes certain of the SEC's staff views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. We are presently evaluating the impact, if any, that SAB 101 will
have on our reported results.
-16-
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
On July 25, 2000 we completed an $18.7 million private placement of
approximately 3.3 million shares of our common stock to institutional
and other accredited investors including Sofinov societe financiere
d'innovation Inc., a subsidiary of the Caisse de depot et placement du
Quebec, along with several other institutional and individual
investors. The investors purchased unregistered common stock at $5.59
per share, a 13% discount to the 20-day weighted-average closing price
as of the June 21, 2000 pricing date. In addition, a portion of the
proceeds were used to repurchase, at $5.59 per share, and retire
418,809 shares from the estate of Allen Paulson. The financing was
exempt from the registration requirement of the Securities Act of
1933, as amended, in reliance upon Regulation D promulgated under the
Act. In connection with the private placement we paid fees totaling to
$958,000 to Gerard Klauer Mattison & Co., Inc. and Gruntal & Co.,
L.L.C. for acting as placement agents.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on July 27, 2000, the
shareholders voted on the following proposals. Each such proposal was
approved.
Proposal 1: Election of Directors for the coming year. The balloting
-----------
for the directors was as follows:
Against/ Abstained/
For Withheld Non-Votes
-----------------------------------------
Connie R. Curran 33,874,135 35,643 0
Cam L. Garner 33,874,299 35,479 0
James C. Gilstrap 33,873,630 36,148 0
Richard O. Martin 33,874,830 34,948 0
J. Michael Paulson 33,875,130 34,648 0
Michael K. Perry 32,626,935 1,282,843 0
Proposal 2: Approve an amendment to the Company's Restated Articles
-----------
of Incorporation to increase the number of authorized shares of common
stock from 50,000,000 to 100,000,000.
Of the shares voted, 33,549,915 shares were voted in favor of the
amendment, 282,702 shares were voted against amendment, 77,161 shares
abstained from voting and there were no broker non-votes.
-17-
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders (Continued)
Proposal 3: Ratify the Board's selection of KPMG LLP as the Company's
-----------
independent accountants for the fiscal year ending November 30, 2000.
Of the shares voted, 33,865,957 shares were voted in favor of the
ratification, 17,032 shares were voted against ratification, 26,789
shares abstained from voting and there were no broker non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation as filed July 27,
2000.
10.1* OEM Development and Purchase Agreement between
CardioDynamics International Corporation and GE
Marquette Medical Systems, Inc., dated July 7, 2000.
27 Financial Data Schedule
________________________________________________________________
* Confidential treatment has been requested as to certain portions of
this Exhibit pursuant to Rule 406 promulgated under the Securities
Act. Such portions have been omitted and filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K:
On August 11, 2000, the Company filed a report on Form 8-K with
regard to a July 25, 2000 event: the completion of a $18.7
million ($15.1 net) common stock private placement with
institutional and accredited investors and the addition of
Jacques Douziech and Michael Paulson to its Board of Directors.
The report included material under Item 5 and Item 7 of Form 8-K.
-18-
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
This Form 10-QSB 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 our plans,
goals, strategies, intent, beliefs or current expectations. These statements
are expressed in good faith and we believe had 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. These statements are only
predictions and actual results could differ materially. Certain factors that
might cause such a difference as well as other risks are detailed in the
Company's annual report on Form 10-KSB for the fiscal year ended November 30,
1999 and any later filed SEC reports. Any forward-looking statement speaks only
as of the date we made the statement, and we do not undertake to update the
disclosures contained in this document or reflect events or circumstances that
occur subsequently or the occurrence of unanticipated events.
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: October 13, 2000 By: /s/ Michael K. Perry
---------------- -----------------------------
Michael K. Perry
Chief Executive Officer
Date: October 13, 2000 By: /s/ Stephen P. Loomis
---------------- -----------------------------
Stephen P. Loomis
Vice President, Finance
Chief Financial Officer and
Corporate Secretary
-19-
