<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1995 Commission File Number: 0-26656
Cardiotronics Systems, Inc.
---------------------------
(Exact Name of Registrant as specified in its charter)
Colorado 33-0327520
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(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
5966 La Place Court, Carlsbad, California 92008
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 431-9446
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X
------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock , as of the latest practicable date.
Class Outstanding at November 9, 1995
- ----- -------------------------------
Common Stock ($.012 Par Value) 471,802 shares
<PAGE>
Part I. Financial Information
---------------------
Consolidated Statements of Operations-
Three and Nine Months Ended September 30, 1995 and 1994
Consolidated Balance Sheets-
September 30, 1995 and December 31, 1994
Consolidated Statements of Cash Flows-
Three and Nine Months Ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
-----------------
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1995 September 30, 1994 September 30, 1995 September 30, 1994
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales $2,369,211 $443,123 $6,191,706 $1,205,006
Cost of Sales 1,283,899 128,606 3,283,343 361,391
------------- ------------- ------------- -------------
Gross Profit 1,085,312 314,517 2,908,363 843,615
Expenses:
Selling, General and Administrative 1,406,309 815,478 4,239,862 1,967,693
Research and Development 98,515 21,735 273,217 53,215
Patent Litigation 102,316 - 950,820 -
Amortization of Intangible Assets 234,981 - 704,726 -
------------- ------------- ------------- -------------
Operating Loss (756,809) (522,696) (3,260,262) (1,177,293)
Interest Income 10,747 18,792 35,403 40,643
Interest Expense 113,623 9,632 330,678 18,671
------------- ------------- ------------- -------------
Net Loss ($859,685) ($513,536) ($3,555,537) ($1,155,321)
============= ============= ============= =============
Net Loss per Common Share ($1.82) ($1.09) ($7.54) ($2.45)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding(a) 471,802 471,802 471,802 471,802
============= ============= ============= =============
</TABLE>
(a) Excludes preferred stock convertible into
2,892,031 shares of common stock in
1994 and 1995
See notes to consolidated financial statements
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS September 30, 1995 December 31, 1994
- ------ ------------------ -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 227,615 $ 128,655
Short-Term Investments - 499,742
Accounts Receivable, net of allowance
for doubtful accounts of $15,088 1,108,931 806,422
Inventories, net 655,633 754,270
Other Current Assets 444,046 400,414
-------------- --------------
Total Current Assets 2,436,225 2,589,503
EQUIPMENT AND FURNISHINGS, NET 561,514 353,576
EXCESS OF COST OVER NET ASSETS OF
BUSINESS ACQUIRED, NET 7,623,708 8,032,122
PATENTS AND TRADEMARKS, NET 4,456,543 4,745,372
OTHER ASSETS 292,831 281,492
-------------- --------------
Total Assets $ 15,370,821 $16,002,065
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts Payable 1,618,011 826,444
Accrued Liabilities 496,811 715,232
Deferred Rent 44,849 123,013
Notes Payable to Shareholder 500,000 -
Note Payable to Bank 6,000,000 -
-------------- --------------
Total Current Liabilities 8,659,671 1,664,689
Note Payable to Bank - 4,078,222
Other Long Term Liabilities 7,536 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, $.03 par
Value
40,000,000 Shares authorized
Series B Preferred Stock, 2,250
(1994) and 0 (1995)
shares issued and outstanding - 68
Series C Preferred Stock, 2,765,872
(1994) and 2,768,122 (1995)
shares issued and outstanding 83,043 82,975
Series D Preferred Stock, 2,119,828
(1994) and (1995)
shares issued and outstanding 63,595 63,595
Series E Preferred Stock, 6,680,172
(1994) and (1995)
shares issued and outstanding 200,405 200,405
Common Stock, $.012 par Value;
100,000,000
shares authorized; 471,802 (1994)
and (1995)
issued and outstanding 5,662 5,662
Additional Paid in Capital 16,500,085 16,500,085
Accumulated Deficit (10,149,176) (6,593,636)
-------------- --------------
Net Stockholders' Equity 6,703,614 10,259,154
-------------- --------------
Total Liabilities and
Stockholders' Equity 15,370,821 16,002,065
============== ==============
</TABLE>
See notes to consolidated financial statements
<PAGE>
CARDIOTRONICS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/95 9/30/94 9/30/95 9/30/94
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss ($859,685) ($513,536) ($3,555,537) ($1,155,321)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 265,786 9,417 788,394 25,487
Amortization of premium on securities - - 7,561 -
Book value of equipment disposed of - - 1,804 -
Gain on sale of short term investments - - (4,429) -
Changes in operating assets and liabilities
Accounts receivable, net (160,940) (27,050) (302,509) (72,916)
Inventories, net 64,140 (44,888) 98,637 (79,380)
Other current assets 26,455 (22,182) (54,974) (54,747)
Accounts payable and accrued liabilities 60,342 569,514 573,146 529,504
Deferred liabilities (19,373) (4,445) (70,628) (10,894)
------------ ------------ ----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES (623,275) (33,170) (2,518,535) (818,267)
INVESTING ACTIVITIES
Proceeds from sale of short term investments - - 496,610 -
Capitalized Patent Costs (7,484) - (7,484) -
Purchases of equipment and furnishings (206,465) (32,479) (293,409) (68,519)
Purchase of R2 Medical Systems, Incorporated,
net of cash acquired - (13,502,900) - (14,604,977)
------------ ------------ ----------- -----------
NET CASH PROVIDED/(USED) BY
INVESTING ACTIVITIES (213,949) (13,535,379) 195,717 (14,673,496)
FINANCING ACTIVITIES
Proceeds from notes payable and
short-term borrowings 900,000 4,500,000 2,421,778 4,500,000
Principal payments on short-term borrowings - (500,000) - (500,000)
Proceeds from sale of preferred stock, net - 10,980,000 - 10,980,000
------------ ------------ ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 900,000 14,980,000 2,421,778 14,980,000
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 62,776 1,411,451 98,960 (511,763)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 164,839 15,879 128,655 1,939,093
------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 227,615 $ 1,427,330 $ 227,615 $ 1,427,330
============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
1. The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All material intercompany profits,
transactions and balances are eliminated upon consolidation.
Losses per common share are calculated using the weighted average number of
common shares outstanding during the period. This computation excludes
convertible preferred stock and options outstanding, since their effect
would be anti-dilutive.
All per share amounts have been restated to reflect the one for four reverse
split on common stock effective June 21, 1995.
2. In the opinion of management, the unaudited financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary to
present fairly the financial position, results of operations, and cash flows
as of and for the periods indicated. These results are not necessarily
indicative of the results to be expected for the full fiscal year.
The financial information presented herein should be read in conjuction with
the financial statements and notes included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1994.
3. Commitments and Contingencies.
In July 1994, the Company's subsidiary R2 Medical Systems, Inc. was named as
a defendant in a product liability action in the Supreme Court of the State
of New York, County of Suffolk, entitled J. Michael Kramer vs. County of
Suffolk, et. al. (the "action"). The action alleges, among other things,
that defibrillation pads manufactured by R2 Medical Systems were defective
and seeks damages of $20 million. Given the early stage of this litigation,
the Company is unable to assess the likelihood of an adverse outsome or
estimate the amount or range, if any, of any possible loss. An adverse
judgment could have a material adverse effect on the financial condition of
the Company.
4. Subsequent Event.
In October 1995, the Company borrowed $1 million from two shareholders under
demand notes at an interest rate of 6%. The Company used proceeds to repay a
$500,000 loan from a shareholder and to reduce its borrowing under its bank
credit line by $100,000.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
- ---------------------
Net sales for the three months ended September 30, 1995 were $2,369,211 compared
to $443,123 in the prior year. Net sales for the nine months ended September 30,
1995 were $6,191,706 compared to $1,205,006 in the prior year. The current year
results include the results of R2 Medical Systems, Inc., which was acquired
effective September 30, 1994 and accounted for most of the sales increase,
although Cardiotronic brand sales increased over 50% over the prior year. Prices
had almost no effect, with virtually all of the sales increase in Cardiotronic
brand sales due to increases in unit sales. Backorders were not significant at
September 30, 1995.
Cost of sales for the three months ended September 30, 1995 were $1,283,899
compared to $128,606 in the prior year. Cost of sales for the nine months ended
September 30, 1995 were $3,283,343 compared to $361,391 in the prior year. The
increases are due to increased sales and additions to manufacturing personnel,
equipment and facilities. The gross margin was 46% in the quarter compared to
71% in the prior year. The decrease is due in part to changes in the sales mix,
with R2 product sales carrying lower margins and write-offs of obsolete
inventory. The year-to-date gross margin was 47% compared to 70% in the prior
year due to start up costs associated with moving production of R2 product from
Illinois to California and the impact of R2 product on the sales mix. Managment
is working to reduce manufacturing costs and expects gross margins to improve,
but not to the levels prior to the R2 acquisition.
Selling, general and administrative expenses for the three months ended
September 30, 1995 were $1,406,309 compared to $815,478 in the prior
year. Selling, general and administrative expenses for the nine months ended
September 30, 1995 were $4,239,862 compared to $1,967,693 in the prior year. The
increases were primarily due to increased personnel, recruiting and relocation
expenses, legal expenses other than patent litigation and expenses of providing
interface systems to customers.
Research and development expenses for the three months ended September 30, 1995
were $98,515 compared to $21,735 in the prior year. R&D expenses for the nine
months ended September 30, 1995 were $273,217 compared to $53,215 in the prior
year. The increases are due to planned increases in personnel.
Patent litigation expense for the three and nine months ended September 30, 1995
were $102,316 and $950,820, respectively. These expenses are related to the
Company's lawsuit against several defendants (see footnote 9 in the Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1994). Most of the
discovery in this litigation has been concluded and management expects these
expenses to decrease until close to commencement of trial, which is not expected
to occur until sometime in 1996.
Interest expenses for the three and nine months ended September 30, 1995 was
$113,623 and $330,678, respectively. The Company incurred debt to finance part
of the purchase price of R2 Medical and has incurred additional debt to finance
current operations.
<PAGE>
Financial Condition
- -------------------
For the nine months ended September 30, 1995, net cash used in operating
activities was $2,518,535 compared to $818,267 in the prior year. The increase
was due primarily to the increased net loss, offset in part by increased
depreciation and amortization, and to increased accounts receivables.
As of September 30, 1995, the Company had a working capital deficit of
$6,223,446 including notes payable to bank of $6,000,000 and notes payable to
shareholder of $500,000. The bank borrowings are under a $6 million credit line
which matures on February 28, 1996. The notes payable to shareholder are demand
notes.
In October, 1995 the Company borrowed $1 million from two shareholders, $500,000
of which was used to repay the notes payable to shareholder and $100,000 of
which was used to reduce bank borrowings (see footnote 3 in the Notes to
Consolidated Financial Statements).
The Company will continue to use net cash in operating activities as long as net
losses continue to be significant, resulting in a need for external sources of
financing. The Company is continuing to assess its cash requirements and will
seek to renew the bank credit line. The Company also expects to borrow
additional money from two shareholders.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None.
b) Reports on Form 8-K
None during the three months ended September 30, 1995 and through the date
of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cardiotronics Systems, Inc.
/s/ Ronald R. Bromfield
-------------------
Ronald R. Bromfield
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Craig R. Dvorak
---------------
Craig R. Dvorak
Vice President, Finance
(Principal Financial Officer)
Date: November 9, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 227,615
<SECURITIES> 0
<RECEIVABLES> 1,108,931
<ALLOWANCES> 15,088
<INVENTORY> 655,633
<CURRENT-ASSETS> 2,436,225
<PP&E> 561,514
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,370,821
<CURRENT-LIABILITIES> 8,659,671
<BONDS> 0
<COMMON> 5,662
0
347,043
<OTHER-SE> 6,350,909
<TOTAL-LIABILITY-AND-EQUITY> 15,370,821
<SALES> 6,191,706
<TOTAL-REVENUES> 0
<CGS> 3,283,343
<TOTAL-COSTS> 6,168,625
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 330,678
<INCOME-PRETAX> (3,555,537)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,555,537)
<EPS-PRIMARY> (7.54)
<EPS-DILUTED> 0
</TABLE>
