<PAGE>
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 SEPTEMBER 30, 1998
-------------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number 0-19567
CARDIAC SCIENCE, INC.
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(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 33-0465681
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1176 MAIN STREET, SUITE C, IRVINE, CALIFORNIA 92614
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(Address of principal executive offices)
Issuer's telephone number, including area code: (949) 587-0357
Check whether the issuer (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
--- ---
The number of shares of the Common Stock of the registrant outstanding as of
November 6, 1998 was 5,704,560.
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CARDIAC SCIENCE, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of September 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Condensed Statements of Operations (Unaudited) for the
Three and Nine months ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the
Nine months ended September 30, 1998 and 1997 5
Consolidated Condensed Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
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Item 1. FINANCIAL STATEMENTS
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 153,688 $ 561,351
Trade accounts receivable-net of allowances of $8,000 and $16,028,
respectively 131,781 216,162
Inventory 184,609 209,413
Prepaid expenses 17,061 99,267
------------------ ------------------
Total current assets 487,139 1,086,193
Equipment, net 117,504 85,927
Intangible assets, net of amortization of $98,569 and $49,285, respectively 558,568 607,853
Other assets 4,012 4,012
------------------ ------------------
$ 1,167,223 $ 1,783,985
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligation $ 3,285 $ ---
Bank line of credit 175,000 ---
Accounts payable and accrued expenses 1,665,289 1,016,323
Notes payable 141,787 70,233
------------------ ------------------
Total current liabilities 1,985,361 1,086,556
------------------ ------------------
Long term portion of capital lease obligation 17,440 ---
------------------ ------------------
Stockholders' Equity (Deficit):
Preferred Stock - $.001 par value; 1,000,000 shares authorized, none
issued or outstanding --- ---
Common stock - $ 0.001 par value; 20,000,000 shares authorized, 5,674,560
issued and outstanding at September 30, 1998 and 4,974,560 at
December 31, 1997 5,675 4,975
Common stock subscribed 200,000
Additional paid-in capital 8,336,246 7,472,107
Accumulated deficit (9,377,499) (6,779,653)
------------------ ------------------
Total stockholders' equity (deficit) (835,578) 697,429
------------------ ------------------
$ 1,167,223 $ 1,783,985
------------------ ------------------
------------------ ------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 318,940 $ 380,050 $ 1,121,296 $ 789,048
Cost of sales 211,569 238,088 728,582 447,535
----------------- ---------------- ----------------- -----------------
Gross profit 107,371 141,962 392,714 341,513
Operating expenses:
Research and development 437,889 127,663 1,435,079 257,591
Selling expenses 154,325 100,059 509,135 215,252
General and administrative 312,353 279,080 1,029,176 671,839
----------------- ---------------- ----------------- -----------------
Loss from operations (797,196) (364,840) (2,580,676) (803,169)
Interest (expense) net (5,645) (1,545) (14,771) (2,663)
----------------- ---------------- ----------------- -----------------
Loss before provision for income taxes (802,841) (366,385) (2,595,447) (805,832)
Provision for income taxes --- 695 2,400 800
----------------- ---------------- ----------------- -----------------
Net loss $ (802,841) $ (367,080) $ (2,597,847) $ (806,632)
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
Basic and diluted loss per share $ (0.14) $(0.10) $ (0.49) $ (0.23)
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
Number of shares used in the computation of
loss per share 5,651,353 3,821,300 5,276,117 3,558,261
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- - -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1998 1997
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss for the period $ (2,597,847) $ (806,632)
Adjustments to reconcile net loss to net Cash used in operating activities:
Depreciation and amortization 71,053 31,923
Expenses paid with common stock 50,000 ---
Changes in operating assets and liabilities:
Trade receivables 84,381 (115,217)
Inventory 24,804 (75,230)
Prepaid expenses 82,206 (42,733)
Accounts payable and accrued expenses 568,966 60,626
---------------- ---------------
Net cash used in operating activities (1,716,437) (947,263)
---------------- ---------------
Cash from (used) by investing activities:
Cash acquired in Diagnostic Monitoring acquisition --- 43,223
Purchase of equipment (32,620) (24,069)
---------------- ---------------
Net cash from (used) provided by investing activities (32,620) 19,154
---------------- ---------------
Cash provided by financing activities:
Payments of note payable to stockholder (28,446) ---
Proceeds from line of credit 175,000 23,221
Proceeds from note payable 100,000 ---
Proceeds from exercise of warrants 2,000 ---
Proceeds from issuance of and subscription for common stock
1,200,000 1,289,362
Costs of equity subscriptions (107,160) ---
---------------- ---------------
Net cash provided by financing activities 1,341,394 1,312,583
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (407,663) 384,474
Cash and Cash equivalents at beginning of period 561,351 413,311
---------------- ---------------
Cash and cash equivalents at end of period $ 153,688 $ 797,785
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Cardiac Science, Inc. (the "Company") was incorporated on May 20,
1991 to develop, manufacture and market a line of non-invasive (non-surgical)
Automatic External Cardioverter Defibrillator ("AECD") devices (the
"Products") to treat persons suffering from or at high risk of
life-threatening arrhythmias. The Products are designed to continuously
monitor, quickly detect and then automatically, through transmission of
electrical energy charges to the patient's heart, terminate the ventricular
tachyarrhythmia (dangerously fast heart rate) and/or ventricular fibrillation
(quivering of the heart following tachyarrhythmia, which usually results in
death). Moreover, the Products will not require the presence of a human
operator to activate the device and deliver the defibrillator charge, as is
the case with existing defibrillators used in hospitals.
2. BASIS OF PRESENTATION AND CONTINUED EXISTENCE
Until the acquisition of Innovative Physician Services, Inc. d/b/a
Diagnostic Monitoring ("Diagnostic Monitoring") on April 11, 1997 (see Note
4), the Company was a development stage company engaged in the development of
the Products for the treatment of arrhythmias that lead to cardiac arrest.
Diagnostic Monitoring develops, manufactures and distributes cardiac devices
and supplies, primarily PC-based Ambulatory ECG ("Holter") systems and Holter
recorders on a worldwide basis.
While the acquisition of Diagnostic Monitoring provides the Company
with a revenue base, additional capital is needed to fulfill the Company's
marketing, research and product development goals. From May 20, 1991
(inception) through September 30, 1998, the Company incurred losses of
$9,377,499. Recovery of the Company's assets is dependent upon future events,
the outcome of which is indeterminable. Additionally, successful completion
of the Company's development program and its transition to attain profitable
operations is dependent upon achieving a level of revenues adequate to
support the Company's cost structure. The Company is currently attempting to
identify other sources of financing. There can be no assurance that the
Company will be successful in these areas.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Company and of its wholly-owned subsidiary, Diagnostic Monitoring. All
inter-company accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the accompanying
consolidated condensed unaudited financial statements include all adjustments
(which consist only of normal recurring adjustments) necessary for a fair
presentation of its financial position at September 30, 1998 and results of
operations and cash flows for the periods presented. Although the Company
believes that the disclosures in these financial statements are adequate to
make the information presented not misleading, certain information and
disclosures normally
6
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included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted and should be
read in conjunction with the Company's audited financial statements included
in the Company's 1997 Annual Report on Form 10-KSB. Results of operations for
the nine months ended September 30, 1998 are not necessarily indicative of
results for the full year.
4. ACQUISITION OF DIAGNOSTIC MONITORING
On April 11, 1997, the Company acquired Diagnostic Monitoring for
500 shares (5,714.285 pre-split) of the Company's Series A Convertible
Preferred Stock (the "Preferred Stock") plus a non-interest bearing
promissory note (the "Note") in the principal amount of $100,000, payable in
eighteen (18) equal consecutive monthly installments commencing upon the
earlier of April 9, 1999 or the completion of an equity financing by the
Company of not less than $2,000,000 of gross proceeds. Each share of
Preferred Stock was entitled to 1,000 votes per share was convertible into
1,000 shares of the Company's common stock, at any time, and from time to
time, at the holder's option, without the payment of any additional
consideration, and was automatically convertible into 1,000 shares of common
stock (subject to adjustment for any reverse stock split, etc.) upon there
being a sufficient number of authorized but unissued shares of common stock
to allow such conversion. There were no dividend rights on the Preferred
Stock. On September 8, 1997, the Company effectuated a one-for-11.42857413
reverse stock split and the shares of Preferred Stock automatically converted
into 500,000 shares of common stock.
The total purchase price for Diagnostic Monitoring was $682,975, the
fair market value of the Preferred Stock issued and the Note. The fair market
value of the Preferred Stock issued was estimated based on the trading value
of the common stock less a 30% discount to take into consideration the lack
of the ability to trade and other features of the Preferred Stock. The fair
market value of the Note represents the discounted value (at 11.25%) of the
Note over 20 months.
The transaction was accounted for under the purchase method of
accounting and the purchase price was allocated to the fair market value of
the assets acquired and liabilities assumed. The intangible assets resulting
from the purchase price allocation is being amortized over 10 years using the
straight-line method.
5. PRIVATE PLACEMENTS
Through September 30, 1998, the Company sold an aggregate of 600,000
shares of its common stock, of which 100,000 shares remained subscribed for
at September 30, 1998. Theses shares were sold at $2.00 per share to foreign
investors in offshore transactions pursuant to Regulation S promulgated under
the Securities Act of 1933, as amended. In connection with such transactions,
the Company is obligated to pay a finder's fee equal to 8.8 percent of the
gross proceeds of the sale, payable in cash or common stock of which $40,000
had been paid at September 30, 1998 and $80,000 was included in accrued
expenses.
In October 1998 the Company completed a private placement of 500,000
shares of common stock and three-year warrants to purchase 125,000 shares of
common stock at $2.50 per share, for an aggregate purchase price of $1
million to a foreign investor in an offshore transaction pursuant to
Regulation S promulgated under the Securities Act of 1933, as amended. In
connection with the offering, the Corporation is obligated to pay a finder a
fee equal to ten percent of the gross proceeds of the sale, payable in cash
or Common Stock, and three-year warrants to purchase 50,000 shares of Common
Stock at $2.20 per share. The investor has agreed to make an additional
investment of $1.5 million, under similar terms, upon the completion of a
strategic partnering agreement.
7
<PAGE>
6. STATEMENT OF FINANCIAL STANDARDS ADOPTED
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". The Company has adopted
the provisions of SFAS No. 131 with respect to its wholly-owned subsidiary
Diagnostic Monitoring, which was acquired April 11, 1997 (Note 4).
All revenues reported for the nine month period ending September 30,
1998, were derived from Diagnostic Monitoring. Net profit for this segment
for the nine month period ended September 30, 1998 was approximately $42,000.
Prior to the acquisition, all items of income and expense were derived from
the operations of Cardiac Science, Inc. and therefore prior periods have not
been restated to reflect segment data.
7. YEAR 2000 ISSUE
In the next fifteen months, many companies will face a potentially
serious information systems (computer) problem because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the Year 2000. This problem could force
computers to either shut down or provide incorrect information and could
result in an inability to process transactions or engage in normal business
activities. Based on a recent assessment the Company believes that the
software utilized by the Company will not be impacted by the Year 2000 Issue.
The Company believes that its existing information systems equipment,
primarily composed of personal computers, will be minimally impacted by the
Year 2000 Issue, as the Company intends to replace those systems which may be
affected by this problem by the end of 1999 due to technological
obsolescence. In addition, the Company's initial products, the Powerheart(R)
AECD(R), and its AECD Tachyarrhythmia Detection Software(TM) are not expected
to encounter any problems with the Year 2000 issue. The Company is in the
process of responding to initial customer inquiries, and intends to initiate
communications with its vendors regarding the Year 2000 Issue in the fourth
quarter of 1998. If the Company determines a particular vendor will be
impacted by this problem, the Company may attempt to identify additional or
replacement vendors, which could delay accessibility of the products and/or
services provided by such vendors. Such a delay or failure to identify an
additional or replacement vendor could have a material adverse effect on the
Company's business, operating results and financial condition.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto set forth
elsewhere in this Quarterly Report on Form 10-QSB.
The Company is engaged in the development of software-driven
non-invasive fully automatic defibrillator devices for the treatment of
tachyarrhythmias that lead to cardiac arrest. The Company commenced
operations in May 1991. Until its acquisition of Diagnostic Monitoring in
April 1997, its operations have consisted primarily of research and
development activities and clinical FDA testing.
The Company has successfully developed proprietary detection and
discrimination software, Automatic External Cardioverter Defibrillator
("AECD-Registered Mark-") Tachyarrhythmia Detection Software-TM-, designed to
continuously monitor and treat persons suffering from, or at high risk of,
life-threatening arhythmias (abnormal rhythms of the heart) such as
ventricular tachycardia (dangerously rapid heart rate) and ventricular
fibrillation (quivering of the heart) that lead to cardiac arrest. The
proprietary software is proven in clinical trials to detect life-threatening
tachyarrhythmias with 100% sensitivity and with specificity approaching zero
false positives. The AECD Tachyarrhythmia Detection Software-TM- received
510(k) clearance from the United States Food and Drug Administration in
August 1998 to allow it to be marketed in the U.S.
Using its proprietary tachyarrhythmia software technology platform,
Cardiac Science developed the Powerheart-Registered Mark- AECD-Registered
Mark-, a non-invasive bedside defibrillator used to continuously monitor
hospitalized cardiac patients for life-threatening tachyarrhythmias and
automatically deliver electrical (defibrillation) shock(s) within seconds,
without human intervention, should a patient suffer cardiac arrest. The
Powerheart-Registered Mark- AECD-Registered Mark- represents a significant
advancement in detection and defibrillator technology and the ability to
effectively manage life-threatening arrhythmias in a hospital environment.
Drawing on the technologies that have made "hands-off" defibrillation and
implantable defibrillation possible and fusing this with advanced monitoring
capabilities, the Powerheart introduces the unique ability to provide
continuous monitoring and automatic therapy. The Powerheart received 510(k)
clearance from the United States Food and Drug Administration in October 1997
to allow it to begin marketing in the U.S. The Company is in the process of
completing the commercial version of the Powerheart-Registered Mark- and
expects to begin production of the device in early 1999.
The Company anticipates embedding its proprietary software in
numerous medical devices, including portable AED's (e.g. Public Access
Defibrillators-"PAD"), standard "crash-cart" defibrillators, ambulatory
AECD-Registered Mark- devices, as well as bedside patient monitoring systems.
The Company's primary objective is to pioneer the commercialization
of AECD-Registered Mark- devices that obviate the need for human intervention
to successfully treat arrhythmias that lead to cardiac arrest. The Company
believes the AECD-Registered Mark- Products are ideally suited for
hospitalized and non-hospitalized patients temporarily at risk (periods
ranging from days to months) of suffering cardiac arrest. Through its
investment in clinical research, the Company believes it has established
competitive functional and technological advantages in the development of
AECD-Registered Mark- devices. The Company has been issued one patent, and
has one additional patent under exclusive license relating to its
AECD-Registered Mark- technology.
In September 1997 the Company began work to complete development and
begin production of the Powerheart-Registered Mark- commercial model. Upon
completion of the commercial model, of which there can be no
9
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assurance, the Company plans to sell the Powerheart-Registered Mark- through
a strategic U.S. distribution partner and overseas through its existing
network of international distributors.
Diagnostic Monitoring develops, manufactures and distributes cardiac
devices and supplies, primarily PC-based Ambulatory ECG ("Holter") systems
and Holter recorders, on a worldwide basis. Sales are made through qualified
domestic and international distributors, pursuant to strategic distribution
agreements, and managed by Diagnostic Monitoring employees on a
country-by-country basis. Distribution is currently in place with market
coverage in over 40 countries worldwide. In the United States, products are
sold directly by Diagnostic Monitoring to hospitals, physicians, and medical
centers at prices that reflect market conditions. Diagnostic Monitoring's
products are primarily made in the United States. Certain products and
components are subcontracted and manufactured to Diagnostic Monitoring's
specifications.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1998, the Company
had revenues of $318,940 and $1,121,296, and a net loss of $802,481 or
$(0.14) per share and $2,597,847 or $(0.49) per share, respectively, compared
to revenues of $380,050 and $789,048 and a net loss of $367,080 or $(0.10)
per share and $806,632 or $(0.23) per share, respectively, for the three and
nine months ended September 30, 1997.
Revenues generated for all periods are attributable to the sale of
products by the Company's subsidiary, Diagnostic Monitoring. Gross profit on
sales for the period ending September 30, 1998 was 35%. Sales of Diagnostic
Monitoring's Windows 95-Registered Mark- compatible Holter software and
systems, Holter Recorder products, and related Holter supplies represented
77% of the Company's total revenue. Sales of Spirometers accounted for 4%,
PC-based Electrocardiographs accounted for 4% and Ambulatory Blood Pressure
products accounted for 7%. Export sales of Diagnostic Monitoring's products
to international countries represented 85% of the Company's revenue, with the
balance of sales coming from within the United States.
The increased loss for the quarter and year to date period ended
September 30, 1998 is primarily attributable to increased operating costs
offset by gross margins from the sale of products by the Company's subsidiary.
Research and development expenses increased to $437,889 and
$1,435,079, respectively, for the three and nine months ended September 30,
1998, from $127,663 and $257,591, respectively, for three and nine months
ended September 30, 1997. This increase was due to engineering and
pre-production costs associated with the commercialization of the Company's
initial AECD-Registered Mark- product, the Powerheart-Registered Mark-.
Included in the engineering costs related to the commercialization of the
Powerheart-Registered Mark- was a credit of approximately $200,000 resulting
from the settlement of a dispute with a vendor in the quarter ending
September 30, 1998.
Selling expenses increased to $154,325 and $509,135, respectively,
for the three and nine months ended September 30, 1998, from $100,059 and
$215,252, respectively, for three and nine months ended September 30, 1997.
The increase was due to marketing efforts for the Holter Product line
(acquired in 1997) and pre-marketing expense for the Powerheart-Registered
Mark-.
General and administrative expenses increased to $312,353 and
$1,029,176, respectively, for three and nine months ended September 30, 1998,
from $279,080 and $671,839 for the three and nine months ended September 30,
1997. The increase was a result of expenditures incurred to support both the
Holter Product line (acquired in 1997) and infrastructure necessary to
commercialize the Powerheart-Registered Mark- and begin initial preparations
for market release. Expenses, which increased in 1998 as compared to 1997,
included
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amortization of intangible assets, personnel costs and related fringes,
insurance premiums for both product liability and directors and officers
insurance, and professional fees.
Interest expense, net, increased to $5,645 and $14,771 for the three
month and year to date period ended September 30, 1998 as compared to $1,545
and $2,663, respectively, for the same periods in the prior year, due to the
debt incurred in the acquisition of Diagnostic Monitoring and borrowings on
the bank line of credit in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
$153,688 and a working capital deficit of $1,494,937 as compared to cash and
cash equivalents of $561,351 and negative working capital of $363 at December
31, 1997. From inception, the Company's sources of funding for operations
were derived from equity placements aggregating approximately $8,700,000. The
Company has incurred losses of $9,377,499 since inception and expects to
incur substantial additional operating losses as a result of expenditures
related to the marketing, research and product development activities,
completion and initiation of clinical trials for current and future products
and costs associated with the development of a commercial model and
pre-production costs for the Powerheart(R) product. The timing and amounts of
these expenditures will depend upon many factors, some of which are beyond
the Company's control, such as the results of clinical trials, the
requirements for and time required to obtain approval of 510(k) applications
or other regulatory approvals, the progress of the Company's research and
development programs, and market acceptance of the Company's products.
The Company's cash resources are minimal and the Company has
borrowed $175,000 from a bank on a revolving line of credit secured by all of
the Company's assets. In obtaining the line of credit, the Company covenanted
to maintain a minimum liquidity ratio and a minimum stated net worth. For
each of the months during the period of June 30 through September 30, 1998,
the Company was not in compliance with one or both of these requirements. The
bank, however, has agreed to forbear exercising its remedies for such period
with the condition that the Company repay an amount of $25,000 for each month
that it is not in compliance with the stated covenants. Once the Company is
in compliance with the covenants it can then draw against the line of credit.
Unless and until the Company is able to raise additional equity capital, the
Company does not anticipate being in compliance with the minimum stated net
worth requirement and will be required to seek the bank's waiver or
forbearance in exercising its remedies for those periods in which the Company
is not in compliance. There can be no assurance that such waivers or
forbearances will be granted.
In September 1998 the Company obtained a non-interest bearing loan
of $100,000 repayable in 90 days. In consideration for this loan, the Company
issued three year warrants to purchase 50,000 shares of common stock at a
price of $2.00. No amounts have been assigned to these warrants due to
immateriality.
As explained in Note 5 to the financial statements, in October 1998
the Company completed a private placement of 500,000 shares of common stock
and three-year warrants to purchase 125,000 shares of common stock at $2.50
per share, for an aggregate purchase price of $1 million and the investor has
agreed to make an additional investment of $1.5 million under similar terms
upon the Company achieving near term milestones. There can be no assurance
that such milestones will be achieved. No amounts have been assigned to these
warrants due to immateriality.
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The Company anticipates that its current cash balance combined with
the realization of the $1 million in October 1998 and an additional $1.5
million upon achievement of near term milestones, will be sufficient to meet
the Company's cash requirements for at least the next six months. Given the
current sales volume and applications of cash, the Company expects that
further capital additions will be necessary to sustain growth until the
Company becomes cash positive. In this respect, the Company is considering a
number of alternatives, including additional equity financings and corporate
partnerships. There can be no assurance that any such transactions will be
available at terms acceptable to the Company or that any financing
transaction will not be dilutive to current stockholders or that the Company
will have sufficient working capital to fund future operations.
FORWARD LOOKING STATEMENTS
The Company desires to take advantage of certain provisions of the
Private Securities Litigation Reform Act of 1995 that provide a "safe harbor"
for forward looking statements made by or on behalf of the Company. Except
for the historical information contained herein, the matters discussed herein
are forward looking statements. The forward looking statements contained in
this Quarterly Report on Form 10-QSB are subject to various risks,
uncertainties and other factors that could cause actual results to differ
materially from the results anticipated in such forward looking statements.
Included among the important risks, uncertainties and other factors are those
hereinafter discussed, the accuracy of which is necessarily subject to risks
and uncertainties.
Few of the forward looking statements in this Quarterly Report on
Form 10-QSB deal with matters that are within the unilateral control of the
Company. There is substantial regulation of the manufacture and sale of
medical products, including many of the Company's products, by governmental
agencies in the United States and foreign countries. These government
agencies often have considerable discretion in determining whether and when
to approve the marketing of the Company's products that have not yet received
such approval.
The availability of equity and debt financing to the Company is
affected by, among other things, domestic and world economic conditions and
the competition for funds. Rising interest rates might affect the feasibility
of debt financing that is offered. Potential investors and lenders will be
influenced by their evaluations of the Company and its products and
comparisons with alternative investment opportunities.
Many of the Company's competitors have greater financial resources
and technical capabilities than the Company, which may enable such
competitors to design and produce superior products or to market their
products in a manner that achieves commercial success even in the face of
technical superiority on the part of the Company's products.
The Company's patents may not offer effective protection against
competitors. Competitors may be able to design around the Company's patents
or employ technologies not covered by such patents. In addition, the
Company's patents may be challenged, and even if such patents are upheld, the
diversion of financial and human resources associated with patent litigation
could adversely affect the Company. The Company may be found to be violating
the patents of others and forced to obtain a license under such patents or
modify the design of its products.
Rapid technological developments are expected to continue in the
industries in which the Company competes. The Company may not be able to
develop, manufacture and market products which meet changing user
requirements or which successfully anticipate or respond to technological
changes in a cost-effective and timely manner.
12
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CARDIAC SCIENCE, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) None.
b) The Company filed a report on Form 8-K dated August 10,
1998 with the Commission relating to sale of equity
securities pursuant to Regulation S promulgated under the
Securities Act of 1933, as amended.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
CARDIAC SCIENCE, INC.
Date: November 10, 1998 /s/ Brett L. Scott
------------------- -------------------
Brett L. Scott
Chief Financial Officer
14
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 153,688
<SECURITIES> 0
<RECEIVABLES> 131,781
<ALLOWANCES> 0
<INVENTORY> 184,609
<CURRENT-ASSETS> 487,139
<PP&E> 211,891
<DEPRECIATION> 94,387
<TOTAL-ASSETS> 1,167,223
<CURRENT-LIABILITIES> 1,985,361
<BONDS> 0
0
0
<COMMON> 5,675
<OTHER-SE> (841,253)
<TOTAL-LIABILITY-AND-EQUITY> 1,167,223
<SALES> 318,940
<TOTAL-REVENUES> 318,940
<CGS> 211,569
<TOTAL-COSTS> 1,116,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,645
<INCOME-PRETAX> (802,841)
<INCOME-TAX> 0
<INCOME-CONTINUING> (802,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (802,841)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
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