<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, 1999
-----------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number 0-19567
CARDIAC SCIENCE, INC.
-------------------------------------------------------------------
(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 7, 1999 was 7,888,332.
<PAGE>
CARDIAC SCIENCE, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
-----------------------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Condensed Statements of Operations (Unaudited) for the
Three months ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the
Three months ended March 31, 1999 and 1998 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 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>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 391,862 $ 1,247,602
Prepaid expenses 43,468 30,129
------------------- ------------------
Total current assets 435,331 1,277,731
Equipment, net 216,669 117,710
Investment in unconsolidated affiliate 111,000 115,000
Other assets 45,266 45,266
------------------ -------------------
$ 808,265 $ 1,555,707
------------------ -------------------
------------------ -------------------
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current liabilities:
Current portion of capital lease obligation $ 18,966 $ 3,413
Accounts payable and accrued expenses 1,536,928 1,599,216
Notes payable 93,749 225,000
------------------ -------------------
Total current liabilities 1,649,643 1,827,629
------------------ -------------------
Long term portion of capital lease obligation 90,465 16,001
------------------ -------------------
Stockholders' (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, 7,138,332
issued and outstanding at March 31, 1999 and 7,014,738 at
December 31, 1998 7,138 7,015
Common stock subscribed 500,000 100,000
Additional paid-in capital 10,937,567 10,823,448
Accumulated deficit (12,376,548) (11,218,386)
------------------ -------------------
Total stockholders' (deficit) (931,843) (287,923)
------------------ -------------------
$ 808,265 $ 1,555,707
------------------ -------------------
------------------ -------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1998
Three Months Ended (Restated see
March 31, 1999 Note 5)
------------------- -----------------
<S> <C> <C>
Operating expenses:
Research and development $ 597,028 $ 418,279
Marketing 275,249 50,051
General and administrative 281,112 252,165
------------------- -----------------
Loss from continuing operations (1,153,389) (720,495)
Interest expense, net (3,172) (4,029)
-------------------- -----------------
Loss from continuing operations before provision
for income taxes (1,156,561) (724,524)
Provision for income taxes 1,600 1,600
------------------- ----------------
Net loss from continuing operations (1,158,161) (726,124)
Income from discontinued operations, net of
income taxes --- 14,618
------------------- -----------------
Net loss $ (1,158,161) $ (711,506)
------------------- -----------------
------------------- -----------------
Basic and diluted income (loss) per share:
Continuing Operations $ (0.16) $ (0.15)
Discontinued Operations --- 0.01
------------------- -----------------
Net income (loss) per share $ (0.16) $ (0.14)
------------------- -----------------
------------------- -----------------
Weighted average number of shares used in the
computation of net loss per share 7,072,360 4,984,560
------------------- -----------------
------------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
Three months March 31,1998
ended (Restated see Note
March 31,1999 5)
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,158,161) $ (711,506)
Adjustments to reconcile net loss to net
cash used in operating activities from continuing operations:
Income from discontinued operations --- (14,618)
Depreciation and amortization 12,140 9,728
Compensation related to fair value of options granted to non-
employees 4,700 ---
Expenses paid with common stock 84,195 20,000
Changes in operating assets and liabilities,exclusive of Diagnostic
Monitoring:
Prepaid expenses (13,338) (16,953)
Accounts payable and accrued expenses (12,289) 156,611
------------------ -------------------
Net cash provided by operating activities from continuing operations (1,082,753) (556,738)
------------------ -------------------
Net cash used in discontinued operations --- 15,665
------------------ -------------------
Cash flows from investing activities:
Purchase of equipment (36,635) (2,868)
Decrease in other assets 4,000 ---
------------------ -------------------
Net cash used by investing activities (32,635) (2,868)
------------------ -------------------
Cash flows from financing activities:
Payments on notes payable (131,252) (13,928)
Proceeds from line of credit 200,000
Proceeds from note payable 200,000
Proceeds from common stock subscribed 500,000 ---
Proceeds from exercise of common stock warrants 350 ---
Costs of equity issuances (109,450) (20,987)
------------------ -------------------
Net cash provided by financing activities 259,648 365,085
------------------ -------------------
Net decrease in cash and cash equivalents (855,740) (178,856)
Cash and cash equivalents at beginning of period 1,247,602 561,351
------------------ -------------------
Cash and cash equivalents at end of period $ 391,862 $ 382,495
------------------ -------------------
------------------ -------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Cardiac Science, Inc. (the "Company") was incorporated on May 20, 1991
to develop, manufacture and market software driven 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, all of which are still under
development, 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).
On April 11, 1997, the Company acquired Innovative Physician Services,
Inc. (d.b.a. Diagnostic Monitoring) ("DM"). The Company sold substantially
all of the assets of Diagnostic Monitoring on December 31, 1998 (see notes 4
and 5).
2. CONTINUED EXISTENCE
Additional capital is needed to fulfill the Company's current marketing,
research and product development goals. Through March 31, 1999, the Company
incurred losses of approximately $12.3 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 anticipates that its current cash
balance will be sufficient to meet the Company's cash requirements through
June 30, 1999. Given the current applications of cash, the Company expects
that additional capital will be necessary to sustain growth and viability. 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, if at all, 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. If the Company is not able to
raise additional funds, it may be required to significantly curtail or cease
its operating activities. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1999 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 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
6
<PAGE>
included in the Company's 1998 Annual Report on Form 10-KSB. Results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of results for the full year.
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On December 31, 1998, the Company acquired a 7.7% voting interest in
Biosensor as partial consideration for the sale of substantially all of the
assets of DM. The Company accounts for this investment using the equity
method of accounting in accordance with Accounting Principles Board Opinion
No. 18.
5. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the sale of substantially
all of DM's assets to Biosensor, a Minnesota corporation, pursuant to an
Agreement for Purchase and Sale of Assets dated December 31, 1998. The
Company received, in consideration for the sale, 1,440,000 shares of common
stock of Biosensor valued at $115,000. In addition, Biosensor assumed certain
liabilities amounting to approximately $107,000.
The Company has restated its prior financial statements to present the
operating results of DM as a discontinued operation. Included in the income
from discontinued operations is amortization of goodwill of $16,428.
Operating results from discontinued operations are as follows:
<TABLE>
<CAPTION>
For the three months
ended March 31, 1998
--------------------
<S> <C>
Sales $ 446,712
Cost of sales 290,363
----------------
Gross profit 156,349
Operating expenses:
Research and development 1,459
Selling 89,467
General and administrative 50,005
----------------
Income from discontinued operations 15,418
Interest income (expense), net ---
----------------
Income from discontinued operations before
provision for income taxes 15,418
Provision for income taxes 800
----------------
Net income from discontinued operations $ 14,618
----------------
----------------
</TABLE>
6. PRIVATE PLACEMENTS
On March 31, 1999, the Company completed a private placement of 250,000
shares of common stock and three-year warrants to purchase 62,500 shares of
common stock at $2.50 per share, for an aggregate purchase price of $500,000
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 Company is obligated to pay a finder fee equal to ten
percent of the gross proceeds of the sale, payable in cash or common stock.
In April 1999 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
fee equal to ten percent of the gross proceeds of the sale, payable in cash
or common stock.
7
<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 non-invasive
fully-automatic external defibrillation ("AECD") devices (the "AECD
Products") 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. Diagnostic Monitoring
manufactured PC-based Holter Electrocardiogram ("ECG") systems and Ambulatory
Holter recorders and distributed these products in over 40 countries. The
Company sold substantially all of the assets of Diagnostic Monitoring on
December 31, 1998 (see note 5 of the consolidated financial statements).
Cardiac arrest is the single largest cause of death in the United States
and Europe. The Company's mission is to increase the survival rate of cardiac
arrest victims and create a new standard of care through the development and
commercialization of its proprietary automatic defibrillation technology (the
"AECD Technology").
There are three AECD Products under development by Cardiac Science that
utilize the AECD Technology. The Company's initial product, the Powerheart,
is a bedside defibrillator-monitor designed for in-hospital use. The
Powerheart attaches prophylactically to patients for the purpose of providing
fully-automatic detection and treatment of life-threatening tachyarrhythmias
(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 second AECD Product under development, the
RHYTHMx ECD module, is designed for integration into patient monitoring
systems. Functionally, the RHYTHMx ECD module extends patient monitoring
systems beyond diagnostics to provide patients with the added protection of
automatic therapy delivery without human intervention. The third AECD Product
under development is a fully-automatic public access defibrillator ("PAD")
that can be used by first responders and other non-technical individuals
outside of the hospital environment.
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. The Company has
been issued one patent, has one additional patent under exclusive license and
is in the process of filing additional patents relating to its AECD
technology.
RESULTS OF OPERATIONS
---------------------
Research and development expenses increased to $597,028 from $418,279
for the three months ended March 31, 1999 and 1998, respectively. This
increase was due to engineering and pre-production costs associated with the
commercialization of the Company's initial AECD(R) product, the Powerheart.
Included in these costs were increases in personnel costs and related
fringes, and costs associated with independent engineering contractors.
Marketing expenses increased to $275,249 from $50,051 for the three
months ended March 31, 1999 and 1998, respectively. The increase was a result
of pre-marketing expenses related to the Powerheart
8
<PAGE>
including costs associated with the development of marketing literature and
the addition of personnel and related fringes.
General and administrative expenses increased to $281,112 from $252,165
for the three months ended March 31, 1999 and 1998, respectively. Expenses
which increased for the quarter ended March 31, 1999 as compared to the same
quarter in 1998, included personnel costs and related fringes and
professional fees.
Interest expense, net, decreased to $3,172 from $4,029 for the three
months ended March 31, 1999 and 1998, respectively, due to the declining
balance of the note payable to a bank.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1999, the Company had cash and cash equivalents of $391,862
and a negative working capital of $(1,214,312) as compared to cash and cash
equivalents of $1,247,602 and negative working capital of $(549,898) at
December 31, 1998. From inception, the Company's sources of funding for
operations were derived from equity placements aggregating approximately
$11,700,000. The Company has incurred losses of approximately $12.3 million
since inception and expects to incur substantial additional operating losses
as a result of expenditures related to the marketing and sales support
functions, research and product development activities and the initiation of
clinical trials for future products. 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 has raised $1,500,000 in a series of private placements through
the period ending April 30, 1999, $500,000 of which was received on March 31,
1999. In connection with these private placements the Company paid certain fees
and expenses. Additional capital will be needed to fulfill the Company's
marketing, research and product development goals. Successful completion of the
Company's development program for its AECD Products 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 anticipates that its current cash balance will be sufficient to
meet the Company's cash requirements through June 30, 1999. Given the current
applications of cash, the Company expects that additional capital will be
necessary to sustain growth and viability. 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, if at all, 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. If the
Company is not able to raise additional funds, it may be required to
significantly curtail or cease its operating activities. The accompanying
financial statements have been prepared assuming that the Company will continue
as a going concern.
YEAR 2000 ISSUE
- ---------------
In the next nine 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 most of its existing
9
<PAGE>
information systems equipment, primarily composed of personal computers are
Year 2000 compliant. The Company intends to replace those systems that are
not compliant, the cost of which, is not anticipated to be material. In
addition, the Company's initial products, the Powerheart, and its AECD
Technology are not expected to encounter any problems with the Year 2000
issue. The Company has initiated communications with its vendors regarding
the Year 2000 Issue. Costs spent to date on the Year 2000 issue are minimal
and the Company does not expect to incur additional costs which would be
considered material. 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.
FORWARD LOOKING STATEMENTS
- --------------------------
Except for the historical information contained herein, the matters
discussed herein are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. 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.
10
<PAGE>
CARDIAC SCIENCE, INC.
---------------------
PART II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. LEGAL PROCEEDINGS
-----------------
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
On March 31, 1999, Cardiac Science, Inc. (the "Corporation")
sold 250,000 shares of the Corporation's common stock, par value
$0.001 per share (the "Common Stock"), and three-year warrants
to purchase 62,500 shares of Common Stock at $2.50 per share,
for an aggregate purchase price of $500,000, 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.
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) Exhibits:
27-Financial Data Schedule.
b) Reports on Form 8k - None.
</TABLE>
11
<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: MAY 14, 1999 /s/ BRETT L. SCOTT
-------------- --------------------------
Brett L. Scott
Chief Financial Officer
12
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 391,862
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 435,331
<PP&E> 326,787
<DEPRECIATION> 110,118
<TOTAL-ASSETS> 808,265
<CURRENT-LIABILITIES> 1,646,643
<BONDS> 0
0
0
<COMMON> 7,138
<OTHER-SE> (938,981)
<TOTAL-LIABILITY-AND-EQUITY> 808,265
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,153,389
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,172
<INCOME-PRETAX> (1,156,561)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (1,158,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,158,161)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
