<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 MARCH 31, 1998
----------------------------------------
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number 0-19567
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CARDIAC SCIENCE, INC.
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(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 33-0465681
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1176 MAIN STREET, SUITE C, IRVINE, CALIFORNIA 92614
- ------------------------------------------------------------------------------
(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
May 14, 1998 was 5,134,560.
1
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CARDIAC SCIENCE, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets March 31, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Condensed Statements of Operations (Unaudited)
Three months ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows (Unaudited)
Three months ended March 31, 1998 and 1997 5
Consolidated Condensed Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
----------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 382,495 $ 561,351
Trade accounts receivable-net 190,987 216,162
Inventory 268,837 209,413
Prepaid expenses 116,220 99,267
----------- -----------
Total current assets 958,539 1,086,193
Equipment, net 82,795 85,927
Intangible assets, net of amortization of $65,713 and $49,285, respectively 591,425 607,853
Other assets 4,012 4,012
----------- -----------
$ 1,636,771 $ 1,783,985
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit $ 200,000 $ ---
Accounts payable and accrued expenses 1,195,530 1,016,323
Notes payable 256,305 70,233
----------- -----------
Total current liabilities 1,651,835 1,086,556
----------- -----------
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, 4,984,560
issued and outstanding at March 31, 1998 and 4,974,560 at
December 31, 1997 4,985 4,975
Additional paid-in capital 7,471,110 7,472,107
Accumulated deficit (7,491,159) (6,779,653)
----------- -----------
Total stockholders' equity (deficit) (15,064) 697,429
----------- -----------
$ 1,636,771 $ 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 Three months
ended ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Sales $ 446,712 $ ---
Cost of Sales 290,363 ---
----------- -----------
Gross Profit 156,349 ---
Operating Expenses:
Research and development 419,738 78,536
Selling expenses 139,518 ---
General and administrative 302,170 93,476
----------- -----------
Loss from operations (705,077) (172,012)
Interest income (expense), net (4,029) 3,537
----------- -----------
Loss before provision for income taxes (709,106) (168,475)
Provision for income taxes 2,400 ---
----------- -----------
Net loss $ (711,506) $ (168,475)
----------- -----------
----------- -----------
Basic and diluted loss per share $ (.14) $ (.05)
----------- -----------
----------- -----------
Number of shares used in the computation of loss
per share 4,984,560 3,424,561
----------- -----------
----------- -----------
</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>
Three months Three months
ended ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss for the period $(711,506) $(168,475)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization 22,428 3,019
Expenses paid with common stock 20,000
Changes in operating assets and liabilities:
Trade receivables 25,175 ---
Inventory (59,424) ---
Prepaid expenses (16,953) (1,235)
Accounts payable and accrued expenses 179,207 (13,690)
--------- ---------
Net cash used in operating activities (541,073) (180,381)
--------- ---------
Cash used by investing activities:
Purchase of equipment (2,868) ---
--------- ---------
Net cash used by investing activities (2,868) ---
--------- ---------
Cash provided by financing activities:
Payments of note payable to stockholder (13,928)
Proceeds from line of credit 200,000 ---
Proceeds from note payable 200,000 ---
Costs of equity issuances (20,987)
--------- ---------
Net cash provided by financing activities 365,085 ---
--------- ---------
Net increase (decrease) in cash and cash equivalents (178,856) (180,381)
Cash and cash equivalents at beginning of period 561,351 413,311
--------- ---------
Cash and cash equivalents at end of period $ 382,495 $ 232,930
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements
5
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CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 Company's 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). Among the cardioverter/defibrillator devices
under development by the Company are ambulatory (mobile) AECD devices similar
in function to the Implantable Cardioverter Defibrillator ("ICD") devices
that are either currently approved for sale by the U.S. Food and Drug
Administration (the "FDA") or are undergoing clinical trials. However, the
Company's planned AECD Products will not require surgery to implant the
devices. Moreover, the Company's 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 devices.
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 March 31, 1998, the Company incurred losses of
approximately $7.5 million. 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 March 31, 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
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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 three months ended March 31, 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 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 PLACEMENT
On April 26, 1998, the Company sold 150,000 shares of its common
stock, at $2.00 per share, to a foreign investor in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act of 1933, as
amended. The Company retained the $300,000 previously loaned ($200,000 on
March 31, 1998 and an additional $100,000 on April 1, 1998) to the Company by
such investor as full payment for the purchase price of the shares. In
connection with the offering, the Corporation is obligated to pay a finder's
fee equal to ten percent of the gross proceeds of the sale, payable in cash
or common stock.
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 it's wholly-owned subsidiary
Diagnostic Monitoring, which was acquired April 11, 1997 (Note 4).
All revenues reported for the three month period ending March 31,
1998, $446,712, were derived from Diagnostic Monitoring. Net profit for this
segment for the three month period ended March 31, 1998 was $47,848. 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
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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 non-invasive automatic
defibrillator devices for the treatment of arrhythmias 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.
Cardiac Science's Automatic External Cardioverter Defibrillator
(AECD(R)) devices are designed to treat persons suffering from, or at high
risk of, life-threatening arrhythmias (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 AECD
products will continuously monitor a patient's cardiac activity, detect
abnormalities within seconds, and automatically, without human interaction,
via disposable defibrillator pads attached to the patient's chest, transmit
electrical shock (defibrillation) to convert the patient's heart to a normal
rhythm. Reducing time to defibrillation is widely recognized as the most
effective way to increase survival from cardiac arrest.
There are three AECD devices under development by the Company. The
Company's initial product, the Powerheart(R) defibrillator-monitor for
in-hospital use, received 510(k) clearance from the United States Food and
Drug Administration in October 1997 to allow it to begin marketing its
Powerheart AECD in the United States. The additional AECD products under
development include a light-weight, ambulatory vest model which can be worn
continuously by at-risk cardiac patients and a fully automatic public access
defibrillator which can be used by first responders and other non-technical
individuals outside of the hospital environment.
The Company's primary objective is to pioneer the commercialization
of AECD devices that obviate the need for human intervention to successfully
treat arrhythmias that lead to cardiac arrest. The Company believes the AECD
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 devices. The Company has been issued
one patent, and has one additional patent under exclusive license relating to
its AECD technology.
In September 1997 the Company began work to complete development and
begin production of the Powerheart(R) commercial model. Upon completion of
the commercial model, of which there can be no assurance, the Company plans
to sell the Powerheart(R) through a strategic U.S. distribution partner and
overseas through existing 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
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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 months and year to date ended March 31, 1998, the
Company had revenues of $446,712 and a net loss of $711,506 compared to no
revenues and a net loss of $168,475 for the three months and year to date
period ended March 31, 1997.
Revenues generated for the three months and year to date ended March
31, 1998 are attributable to the sale of products by its subsidiary,
Diagnostic Monitoring. Gross profit on sales for the period ending March 31,
1998 was 35%. Sales of Diagnostic Monitoring's Windows 95(R) compatible
Holter software and systems, Holter Recorder products, and related Holter
supplies represented 78% of the Company's total revenue. Sales of Spirometers
accounted for 3.5% and PC-based Electrocardiographs accounted for 5.2%.
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
March 31, 1998 is primarily attributable to increased operating costs offset
by an increase in gross margins.
Research and development expenses increased to $419,738 for the
three months and year to date period ended March 31, 1998, as compared to
$78,536 for the three month and year to date period ended March 31, 1997.
This increase was due to pre-production costs associated with the
commercialization of the Company's initial AECD(R) product, the Powerheart(R).
Selling expenses for the three months and year to date period ended
March 31, 1998 were $139,518, compared to no expenses in the three months and
year to date period ended March 31, 1997 reflecting the marketing efforts for
the Holter Product line and pre-marketing expense for the Powerheart(R).
General and administrative expenses increased to $302,170 for the
three month and year to date period ended March 31, 1998, from $93,476 for
the same period in 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 and begin initial preparations for
market release. Expenses, which increased in 1998 as compared to 1997,
included 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 $4,029 for the three month and
year to date period ended March 31, 1998 as compared to interest income, net
of $3,537 for the same period 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 March 31, 1998, the Company had cash and cash equivalents of
$382,495 and a working capital deficit of $693,296 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 $7,500,000. The
Company has incurred losses of approximately $7,500,000 since inception and
expects to incur substantial additional operating losses as a result
9
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of expenditures related to the marketing and sales support functions,
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 anticipates that its current cash balance will be
sufficient to meet the Company's cash requirements for at least the next 4
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.
10
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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.
11
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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) None.
12
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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: MAY 14, 1998 /s/ Brett L. Scott
- -------------- -------------------
Brett L. Scott
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 382,495
<SECURITIES> 0
<RECEIVABLES> 190,987
<ALLOWANCES> 0
<INVENTORY> 268,837
<CURRENT-ASSETS> 958,539
<PP&E> 183,352
<DEPRECIATION> 100,557
<TOTAL-ASSETS> 1,636,771
<CURRENT-LIABILITIES> 1,651,835
<BONDS> 0
0
0
<COMMON> 4,985
<OTHER-SE> (20,049)
<TOTAL-LIABILITY-AND-EQUITY> 1,636,771
<SALES> 446,712
<TOTAL-REVENUES> 446,712
<CGS> 290,363
<TOTAL-COSTS> 1,151,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,029
<INCOME-PRETAX> (709,106)
<INCOME-TAX> 2,400
<INCOME-CONTINUING> (711,506)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (711,506)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
