<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2000
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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.)
16931 MILLIKAN AVENUE, IRVINE, CALIFORNIA 92606
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant'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 8, 2000 was 12,364,440.
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CARDIAC SCIENCE, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
-----------------------------
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Condensed Statements of Operations (Unaudited) for the
three months ended March 31, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the
three months ended March 31, 2000 and 1999 5
Consolidated Condensed Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,622,272 $ 5,901,934
Accounts receivable 391,162 102,900
Inventory 885,744 438,592
Prepaid expenses 99,322 59,646
------------ ------------
Total current assets 3,998,500 6,503,072
Equipment, net 457,379 391,085
Other assets 78,681 150,178
------------ ------------
$ 4,534,560 $ 7,044,335
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,126,876 $ 2,092,903
Current portion of capital lease obligation 40,783 25,717
------------ ------------
Total current liabilities 2,167,659 2,118,620
------------ ------------
Long term portion of capital lease obligation 174,576 103,507
------------ ------------
Stockholders' equity:
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, 12,320,627
issued and outstanding at March 31, 2000 and 12,031,252 at
December 31, 1999 12,320 12,031
Additional paid-in capital 23,837,680 23,748,322
Accumulated deficit (21,657,675) (18,938,145)
------------ ------------
Total stockholders' equity 2,192,325 4,822,208
------------ ------------
$ 4,534,560 $ 7,044,335
============ ============
</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, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Sales $ 624,642 $ --
Cost of goods sold 574,758 --
------------ ------------
Gross profit 49,884 --
Operating expenses:
Research and development 1,138,024 597,028
Sales and marketing 924,764 275,249
General and administrative 717,049 281,112
------------ ------------
Loss from operations (2,729,953) (1,153,389)
Interest income (expense), net 12,023 (3,172)
------------ ------------
Loss from operations before provision
for income taxes (2,717,930) (1,156,561)
Provision for income taxes 1,600 1,600
------------ ------------
Net loss $ (2,719,530) $ (1,158,161)
============ ============
Net loss per share (basic and diluted) $ (0.22) $ (0.16)
============ ============
Weighted average number of shares used in the
computation of net loss per share 12,152,303 7,072,360
============ ============
</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, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,719,530) $(1,158,161)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 27,200 12,140
Compensation related to fair value of options granted to non-
employees 25,000 4,700
Expenses paid with common stock -- 84,195
Changes in operating assets and liabilities:
Accounts receivable (288,262) --
Inventory (447,152) --
Prepaid expenses (39,676) (13,338)
Other assets 71,497 4,000
Accounts payable and accrued expenses 33,973 (12,289)
----------- -----------
Net cash used in operating activities (3,336,950) (1,078,753)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (7,359) (36,635)
----------- -----------
Net cash used by investing activities (7,359) (36,635)
----------- -----------
Cash flows from financing activities:
Payments on notes payable -- (131,252)
Proceeds from common stock subscribed -- 500,000
Proceeds from exercise of common stock warrants 127,379 350
Proceeds from exercise of common stock options 5,000 --
Costs of equity issuances (67,732) (109,450)
----------- -----------
Net cash provided by financing activities 64,647 259,648
----------- -----------
Net decrease in cash and cash equivalents (3,279,662) (855,740)
Cash and cash equivalents at beginning of period 5,901,934 1,247,602
----------- -----------
Cash and cash equivalents at end of period $ 2,622,272 $ 391,862
=========== ===========
</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, 2000
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 to treat persons
suffering from or at high risk of life-threatening arrhythmias. The Company has
developed proprietary tachyarrhythmia detection and discrimination software
technology -- RHYTHMx ECD-TM--- designed to be incorporated into external
defibrillator and patient monitoring devices. RHYTHMx ECD enables these devices,
which are attached prophylactically to hospitalized patients who are determined
to be at temporary risk of cardiac arrest, to continuously monitor their heart
rhythms, accurately and instantly detect life-threatening ventricular
tachyarrhythmias and, when appropriate and without the aid of hospital staff,
automatically deliver potentially life saving defibrillation shocks within
seconds to convert a patient's heart back to its normal rhythm.
2. CONTINUED EXISTENCE
Additional capital is needed to fulfill the Company's current
marketing, research and product development goals. From inception through March
31, 2000, the Company incurred losses of approximately $22 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 into June 2000. 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, 2000 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 included in the
Company's 1999 Annual Report on Form 10-K. Results of operations for the three
months ended March 31, 2000 are not necessarily indicative of results for the
full year.
6
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4. INVENTORY
Inventory, which consists of finished products and subassemblies, is
stated at the lower of cost (first-in, first-out) or market value. Inventory at
March 31, 2000 and December 31, 1999 was comprised of finished goods.
5. TECHNOLOGY INTEGRATION AND DISTRIBUTION LETTER AGREEMENT
In March 2000, the Company entered into an exclusive two year
Technology Integration and Distribution Letter Agreement with Data Critical
Corporation ("DCC") to interface DCC's wireless technology, the AlarmView-TM-
system, with the Company's fully-automatic external cardiac defibrillator
devices. Under the terms of the agreement, the Company is obligated to make
certain minimum purchases of the AlarmView-TM- system and to pay $175,000 in
technology and non-recurring engineering fees of which $150,000 was included in
research and development costs for the three months ended March 31, 2000.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto set forth elsewhere in this
Quarterly Report on Form 10-Q.
Cardiac arrest is the single largest cause of death in the United
States and Europe. Our mission is to increase the survival rate of cardiac
arrest victims and create a new standard of care through the development and
commercialization of our proprietary technology.
We have developed proprietary tachyarrhythmia detection and
discrimination software technology -- RHYTHMx ECD-TM--- designed to be
incorporated into external defibrillator and patient monitoring devices. RHYTHMx
ECD enables these devices, which are attached prophylactically to hospitalized
patients who are determined to be at temporary risk of cardiac arrest, to
- continuously monitor their heart rhythms
- accurately and instantly detect life-threatening ventricular
tachyarrhythmias, and
- when appropriate and without the aid of hospital staff,
automatically deliver potentially life saving defibrillation
shocks within seconds to convert a patient's heart back to its
normal rhythm.
We commenced operations in May 1991. Our operations consisted primarily
of research and development activities and clinical FDA testing until our
acquisition of Diagnostic Monitoring in April 1997. Diagnostic Monitoring
manufactured PC-based Holter Electrocardiogram systems and Ambulatory Holter
recorders and distributed these products in over 40 countries. We sold
substantially all of the assets of Diagnostic Monitoring on December 31, 1998.
We have three products, two of which are still under development,
that utilize our proprietary technology. Our initial product, the
Powerheart-Registered Trademark-, is a fully automatic external bedside
defibrillator-monitor designed for bedside in-hospital use. The Powerheart
attaches prophylactically to "at-risk" cardiac patients for the purpose of
providing fully automatic detection and treatment of life-threatening heart
rhythms (ventricular tachyarrhythmias) that lead to cardiac arrest.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with the world leader in external defibrillation,
Medtronic Physio-Control, a subsidiary of Medtronic, Inc. Medtronic
Physio-Control will market the Powerheart in the U.S., Canada and selected
European countries, and also has been licensed to integrate RHYTHMx ECD into
Medtronic's LIFEPAK-Registered Trademark- line of in-hospital external
defibrillators. We have signed distribution agreements to date covering 30
other international markets giving us representation in over 40 countries.
We received 510(k) clearance from the U.S. Food and Drug
Administration for the clinical version of the Powerheart in October 1997. We
received European regulatory clearance for Powerheart in late 1999 and we
made our first commercial shipment in December 1999. We subsequently received
510(k) clearance from the FDA for the commercial version of the Powerheart in
January 2000. Shipments of Powerhearts to Medtronic Physio-Control, as well
as our international distributors, began in the first quarter of 2000.
The second product, currently under development, is a fully automatic
defibrillator module that is designed for integration into third party
manufactured bedside patient monitoring systems. Functionally, this module is
designed to extend patient monitoring systems beyond diagnostics to provide
patients who suffer life-threatening tachyarrhythmias with the added protection
of automatic therapy delivery without the aid of hospital staff. The
8
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third product, also under development, is a small, wearable, "cell phone sized"
fully automatic defibrillator that is designed to be worn by patients who are
ambulatory in either a hospital or home environment.
We have been issued one patent and we have one additional patent under
exclusive license. In addition, we have three patents pending and we intend to
file additional patents relating to our proprietary technology.
RESULTS OF OPERATIONS
Sales were $624,642 for the three months ended March 31, 2000 as
compared to no sales for the three months ended March 31, 1999. Sales consisted
primarily of Powerheart units to both Medtronic Physio-Control and our
international distributors.
Cost of sales were $574,758 for the three months ended March 31, 2000
as compared to no cost of sales for the three months ended March 31, 1999. This
amount was attributable primarily to the sale of Powerhearts. We anticipate that
our costs of sales as a percentage of sales will decrease in the future due to
improvements in manufacturing and material procurement processes and changes in
the blend of product sales to include accessories and disposable electrodes.
Research and development expenses increased to $1,138,024 for the three
months ended March 31, 2000 from $597,028 for the three months ended March 31,
1999. We continue to invest in new products and the improvement of existing
products. Increases in research and development expenses included increases in
personnel costs and related fringes, costs associated with independent
engineering contractors and a one-time technology fee to Data Critical
Corporation (see note 5 to the consolidated condensed financial statements).
Sales and marketing expenses increased to $924,764 for the three months
ended March 31, 2000 from $275,249 for the three months ended March 31, 1999.
The increases were a result of marketing expenses related to the Powerheart
including costs associated with the development of marketing literature and the
addition of personnel and related fringes.
General and administrative expenses increased to $717,049 for the three
months ended March 31, 2000 from $281,112 for the three months ended March 31,
1999. The increases in expenses for the three months ended March 31, 2000 as
compared to the same period in 1999 included new facility costs, personnel costs
and related fringes, consulting and professional fees.
Interest income, net, increased to $12,023 for the three months ended
March 31, 2000 as compared to interest expense, net of $3,172 for the three
months ended March 31, 1999. The increase in net interest income was derived
from the investment of proceeds from equity placements in the fourth quarter of
1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash and cash equivalents of $2,622,272 and
working capital of $1,830,841 as compared to cash and cash equivalents of
$5,901,934 and working capital of $4,384,452 at December 31, 1999. From
inception, our sources of funding for operations were derived from equity
placements aggregating approximately $21 million. We have incurred losses of
$21,657,675 since inception, and we expect to incur substantial additional
operating losses as a result of expenditures related to marketing and sales
efforts, research and product development activities. The timing and amounts of
these expenditures will depend upon many factors, some of which are beyond our
control, such as the requirements for and time required to obtain approval of
510(k) applications or other regulatory approvals, the progress of research and
development programs, and market acceptance of our products.
9
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Successful completion of our development program for our products and
transition to attain profitable operations is dependent upon achieving a level
of revenues adequate to support the required cost structure.
We anticipate that the current cash balances will be sufficient to meet
our cash requirements into June 2000. Additional capital will be necessary to
ensure our viability. In this respect, we are considering a number of
alternatives, including additional equity financings and corporate partnerships.
We cannot assure you that any such transactions will be available on terms
acceptable to us, if at all, or that any financing transaction will not be
dilutive to current stockholders. We also cannot assure you that we will have
sufficient working capital to fund future operations. If we are not able to
raise additional funds, we may be required to significantly curtail or cease our
operating activities. The accompanying financial statements have been prepared
assuming that we will continue as a going concern.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements, including statements regarding:
- products under development;
- technological and competitive advantages;
- our ability to improve patient care, increase survival rates,
decrease recovery time, lessen patient debilitation, and reduce
patient care costs and
- strategic alliances.
These forward-looking statements are based on current expectations that
involve numerous risks and uncertainties, including those risks and
uncertainties discussed in this Form 10-Q and in our Annual Report on Form 10-K
for the year ended December 31, 1999. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive, and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, we cannot assure you that the results discussed or
implied in such forward-looking statements will prove to be accurate. In light
of the significant uncertainties inherent in such forward-looking statements,
the inclusion of such statements should not be regarded as a representation by
us or any other person that our objectives and plans will be achieved. Words
such as "believes," "anticipates," "expects," "intends," "may," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. We undertake no obligation to
revise any of these forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
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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
During the three-month period ending March 31, 2000, we sold an
aggregate of 286,875 shares of common stock through the exercise
of warrants for an aggregate purchase price of $127,379. Of this
amount 231,875 shares were sold to foreign investors in an
offshore transaction pursuant to Regulation S promulgated under
the Securities Act of 1933. The balance of the shares were sold
pursuant to Section 4(2) of the Securities Act.
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:
27.1 Financial Data Schedule.
b) Reports on Form 8-K:
None.
11
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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 9, 2000 /s/ Brett L. Scott
------------- --------------------------
Brett L. Scott
(Authorized Officer and
Principal Financial Officer)
12
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Index to Exhibits
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET AS OF MARCH 31, 2000 AND THE
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,622,272
<SECURITIES> 0
<RECEIVABLES> 391,162
<ALLOWANCES> 0
<INVENTORY> 885,744
<CURRENT-ASSETS> 3,998,500
<PP&E> 660,920
<DEPRECIATION> 203,541
<TOTAL-ASSETS> 4,534,560
<CURRENT-LIABILITIES> 2,167,659
<BONDS> 0
12,320
0
<COMMON> 0
<OTHER-SE> 2,180,005
<TOTAL-LIABILITY-AND-EQUITY> 4,534,560
<SALES> 624,642
<TOTAL-REVENUES> 624,642
<CGS> 574,758
<TOTAL-COSTS> 2,779,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,023)
<INCOME-PRETAX> (2,717,930)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (2,719,530)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,719,530)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
